There's a .00006% Chance of Building a Billion Dollar Company
firstround.com
firstround.com
if i have 10 coins, 9 of which have 44.4% chance of heads and 1 has 100% chance, choosing a coin at random and flipping it has 50% chance of heads overall. sure, there is one outstanding coin.
the "fallacy" is true when you look at the whole rather than the individual factors, which include aptitude in some cases so i guess you're correct on the last point.
This also comes up all the time in data-science and A/B testing of products. Frequently you'll end up with results like "This change decreased revenue by 3%." Sounds bad, right? Except then you drill into your results and find out that there was a bug in the implementation of the change in IE6, which decreased revenue by 100% on that one browser which happens to be 5% of traffic, and find that your change actually increased revenue by a percent or two, but that one slice cost you all the benefit and more. You fix the bug and happily start making more money.
Always slice your population. Many times blanket probabilities tell you nothing unless you know what's causing them.
P(getting into YC | sold a startup, graduated from Stanford/MIT, worked on/built something awesome, etc)
Or the chance of building a $1B company:
P($1B company | you're in SV, $100MM in funding, etc)
And what if you calculated the chance of starting a billion dollar company in Bentonville Ark (Walmart) which has a population of 38k (which no doubt was way less when Sam Walton decided to locate there). Not bad "odds".
Truly, we don't get where we get because of our capacity or our ability (in most cases). We get lucky, a lot, and we can't really change that.
That depends on how, exactly, you define "luck". I posit that a lot of what people call "luck" can be manufactured, or at least cultivated through directed action.
Remember the article that showed up here a while back about "How to date a supermodel"? The premise was that if you want to date a supermodel, you have to move to a city where there are lots of supermodels, and hang out at the places where supermodels shop, work out, dine, etc., and you have to start conversations with supermodels, blah, blah..
So if one of you buddies shows up next year dating a supermodel, everybody is probably going to go "Dude, that's amazing, you are SO lucky!" And this will completely ignore the fact that he did a lot of things to create the opportunity.
It's SUCH a cliche, but I guess cliches exist for a reason, so I'll just come back to:
Luck = Preparation + Opportunity
Likewise, if you don't want to date anyone at all, you move to silicon valley and work on a startup!
(Kidding! sort of...)
To date one you would need to be compatible with her lifestyle. That means highly successful or at least part of a similar industry like fashion or music. It means that you have to be somebody that can be announced in gossip columns as dating her. It has to be a good career move for her.
Naomi Cambel once walked past me while I was hanging out backstage at New York fashion week. Even if I had said hi there are still significant reasons why I am not now dating her.
And so it is with startups. Pedigree matters, the pedigree of your investors matters. Press matters and is heavily influenced by your position in the network. People in the game are deciding who the winners and losers are. Public perception is influenced by that.
Much of the remaining "luck" comes from our choices. Think of it this way: how many people choose to work a steady job for all of their life. They will never be a billionaire, regardless of how lucky they get, and so their contribution to the average is zero. Actually, I suspect this invalidates your math: more than 1 in 2 people have probability zero of being a billionaire simply by virtue of not taking the chance of being one, and therefore of the people who take the chance, the odds are significantly better than 0.0001%.
People who actually care about these odds (in the sense of betting on them) are founders and investors. Neither, in their decision making process, gets to (or wants to!) uniformly sample all companies.
PG's numbers are thus much more useful to anyone actually trying to make a decision about a pool of investments: assuming the distribution of YC startups is fixed over time, and you are someone like Start Fund who will bet on the pool (i.e. equivalent to a repeated uniform sampling in expected value), the 0.5% is actionable information and the 0.00006% is not.
For example, if the prior on "making a successful company" (defined however you want) were a vastly higher 40%, then I'd imagine a lot more laypeople would take the plunge. Reading sites like TechCrunch makes it seem to the layperson that building a successful company is much easier than it really is. So yes, knowing that "mega success" is a massive outlier (to the tune of 1:1,000,000) is indeed actionable information to a layperson thinking about starting a company without any additional evidence.
As the source article notes: The goal of the entrepreneur is to learn as much as they can, thereby increasing their own odds of success (or minimizing their odds of failure). Obviously, getting into YC massively improves your odds and would probably be a good decision! As a YC alum, my advise would jive with this observation. ;)
FWIW, I really dislike it when people perpetuate the myth that 50% of marriages end in divorce. We actually have no idea what the true percentage is, and I think they myth got started because people compare the annual marriage rate with the annual divorce rage.
http://en.wikipedia.org/wiki/Divorce_demography
But I was just being illustrative; my point applies even if it's 20% or 80%.
That's like saying that I should expect to live to 120, because it's been done before. And, I should ignore the expected lifespan number.
Maybe healthy lifestyle choices will increase my lifespan. But, to expect that I should be a statistical outlier seems risky.
Not necessarily, because people are notoriously bad at evaluating themselves, and often tend to assume that statistics (especially troubling ones) don't apply to them for whatever reason. For the divorce statistic (which I understand is not necessarily accurate, but let's pretend it really is 50%), how many of the divorced couples previously thought the statistic was irrelevant for them, because they're "truly in love" or some other reason?
The article makes some really great points about solving meaningful problems vs starting a startup for it's own sake. It further makes great points about eliminating luck in the process and offers actionable advice on how to do that. I think that would be the subject of a much better conversation.
Defining "'success' as going public or filing to go public by December 9 2003, "they find the overall success rate on first time ventures is 25.3%. Not surprisingly, serial entrepreneurs have an above-average success rate of 36.9% on their first ventures: venture capitalists are more likely to be more enthusiastic about financing a successful entrepreneur than one who has previously failed. It is more interesting that in their subsequent ventures they have a significantly higher success rate (29.0%) than do first time entrepreneurs (25.3%)."
Note that the 99th percentile of valuations in this data set was $131.5 million. Additionally, the data comes from a period of lower competition for "doing a startup". Finally, one must account for survivorship bias that would be present in a 1976-2000 data set of venture capital financing.
[1] http://businessinnovation.berkeley.edu/WilliamsonSeminar/sch...
A more meaningful number might be % chance among companies who received venture funding. A funding event represents a concrete shift in probability of success.
Does anyone commenting here know the probability of, say, a $10M, $100M, and $1B exit after a Silicon Valley funding event (funding from recognized VC)?
P($1B company | you're in SV, $100MM in funding, etc)
Think about a bayesian network and its joint probability.
http://www.quora.com/What-is-the-truth-behind-9-out-of-10-st...
A completely irrelevant headlines for such a nice article. Sad.
You lumped all start-ups together and struck a percentage. Did you consider that there are 1000s of people who are doing what they do not because they want a chance to build a billion-dollar company but rather a chance to providing real solutions to real problems?
People do what they do because they love what they do and as long as it is sustainable they want to be working on it without thinking about some mythical billion-dollar mark.
-Get rid of luck
“When you say you got lucky, you got lucky because you didn’t know what was going to happen. The corollary is, if you know what’s going to happen, then there is no luck. There’s also no uncertainty and no risk,” Friedberg says. “In this context, shouldn’t your objective be to always know what’s going to happen? To always remove the unknowns?”
You can see the world as one of superstition, luck, and magic, or you can see the world as one of logic and explainable order. Nassim Taleb had a few things to say about people using logic to explain random past events, and there is some truth to this as well (which incidentally is probably somewhat relevant to predicting nearly chaotic weather problems.) But, you can make manageable, hedged bets and discover truth to the reality today. The output will be a solved problem that makes customers happy.
There are more opportunities today than I have ever seen before. There are more tools for people to solve these problems than ever before. Look at waste, look for inefficiencies, and remove them even just a little bit at a time. You don't need to build a billion dollar company. But, if you do an excellent job at fixing that small problem, you might end up with a billion dollar company.
A lot of companies make money through introduction of waste, inefficiency, and confusion. They fatten their short term margins while erasing their companies long term viability.
This is one time I wish someone changed the title of the article. It's just silly link bait that hides a really good article.
Buy a billion bottles of water for a penny a bottle and sell it for $1.
Then instead of paying taxes, get checks from the government for pretending to hire people for decent jobs while keeping their wages so low that they have to use taxpayer funded food and medical assistance.
Tada. The "American Way" to become a billionaire.
http://www.nytimes.com/2007/05/26/business/26drink-web.html?...
A "boss" is one discrete individual who can show up, and say "do this" or "do that" and you have, effectively, no choice in the matter at all. You're under that person's thumb and if they micromanage you, you're fucked unless you quit.
With investors, there is less likely to be one person who has that kind of power, and depending on how much equity you've maintained, or how you've structured your board, there might not be anybody with that power. Having to be accountable to a group, in aggregate, is a different beast... and the point is, you're accountable for the outcome but you have a lot more say-so in the "how" and "what".
But then, it's a dificult calculation. The more capital you apply at the company, the more money you must take out of it.
I guess I'm curious how such an obvious typo could appear here. They mean 300m not 300k. But the rest of the paragraph is written in a "so what" way which seems to backup the "small" number.
His math is very suspect in the first place, because 1 in 2 million is roughly what you'd get if you divide the number of billion-dollar exits by the population of the U.S. That's an odd way to slice it; if you want something more representative of an individual person's odds, you're better off dividing the number of billion dollar exits by the number of companies started that believe they have a shot at a billion dollars (which might be in the tens to hundreds of thousands, but certainly not 2 million), and then you end up with figures roughly equivalent to his AEPs, but that ignores that many of those founders are college or grad students and the outcome is getting that job at Google after all.
Even if my excuses for him are correct, I think you all have made a valid point that this is not a really productive way to measure :) Nonetheless, the lesson "don't start a company to get rich" is, I think, a good thing to say.
He says:
"Even if you do raise money and sell a company or take it public"
Given that statement "sell a company or take it public" it would appear that we are definitely talking about people that have gotten to a particular point (where the group narrows quite a bit). Not the chance of getting to that point after starting a company.
For sure the probability is low for getting to the point of taking your company public (or selling) but once you take your company public in no way could he be arguing that the economic benefit is only $300k. Something doesn't make sense here.
His claim: "Even if you do raise money and sell a company or take it public, your median time to doing that is probably 49 months. Assuming there are three founders, your median expected payoff would be $300,000 each — that’s the equivalent of $73,000 a year."
Based upon his Stanford talk (http://www.youtube.com/watch?v=m2sj-U2QSHs at approx. 27:15), these calculations are based upon the paper "The Incentives To Start New Companies: Evidence From Venture Capital" by Robert E. Hall and Susan E. Woodward (http://www.nber.org/papers/w13056).
From Pg. 2 of the Hall/Woodward paper: "Our most important finding is that the reward to the entrepreneurs who provide the ideas and long hours of hard work in these startups is remarkably small, once risk is taken into consideration. The contract between venture investors and entrepreneurs imposes the burden of the idiosyncratic risk of a startup on its entrepreneurs. Far from shifting the risk toward the diversified investors, the contract exacerbates the risk the entrepreneurs face. Although the average ultimate cash reward to the entrepreneurs of a company that succeeds in landing venture capital is $9 million for the group, most of this expected value comes from the small probability of a great success. With a coefficient of relative risk aversion of 2, the entrepreneurs would sell their holding as of the time they receive venture funding for about $900,000 to avoid the undiversified risk of their claim on the company.
It seems to me that this $900k figure (which is the basis for the $73k per year figure) is based upon a scenario where the entrepreneurs sell "as of the time they receive venture funding" and not a scenario where "you do raise money and sell a company or take it public." Isn't the $900k figure referring to a risk-adjusted founder sale a much earlier stage in the process?
Also, from page Pg. 20 of the Hall/Woodward paper: "The median time from first venture funding to exit in our data is 49 months. We do not have data on the typical number of entrepreneur-founding shareholders, but we believe that three is probably representative. The return based on the $900,000 figure is a little over $6,000 per entrepreneur-month. The extreme idiosyncratic risk of venture-backed entrepreneurship and the inability of the venture contract to insure entrepreneurs against the risk result in a tiny incentive facing a prospective entrepreneur."
The part about "The Grind" reminds me a bit of the classic pg essay: "How Not To Die".[1] (My personal favourite, out of all the pg essays I've read).
I love this pg quote, as it's full of inspiration and is about as motivating a quote as I know:
"If you can just avoid dying, you get rich. That sounds like a joke, but it's actually a pretty good description of what happens in a typical startup. It certainly describes what happened in Viaweb. We avoided dying till we got rich."
I suppose if you want to be super technical, you should weigh the risk/reward factor of the profit margin in the costs and the value that would be paid out. I'd argue few of us are capable of doing that math well, nor would it be profitable to spend our time doing it (because we have a business to run/build)
In my case, the only insurance I carry is that which is required by law, or offered for "free" (eg, employer paid insurances). I'd still prefer to have my money. I'm betting that Im quite normal.
Farmers hedge risk for the same reason. A cash crunch could put them out of business. But now that I think about it I can't guess what this weather insurance offers farmers that the commodity futures markets don't.
If I had 4 kids and a mortgage and a tractor payment and... and.. debt and leverage, I guess I'd be a lot more worried.
Similarly, paying hefty premiums to insure cheap consumer goods like mobile phones that you could replace for the cost of 12 months premium plus excess isn't a smart move unless you're especially clumsy, forgetful or liable to be mugged. But a non-wealthy person not getting affordable insurance for lifesaving treatments[1] is crazy (even after factoring in the insurer's margin, and interest on savings you're still gambling on your lifetime treatment costs being not much above the average for a person like you and the bills not coming before you've saved enough - two things which your insurer doesn't care about at all if he's pooled risk well enough.) Not playing Russian Roulette also has a negative ROI...
[1]or living in a country with decent public healthcare
With the same conditions, the probability of the sperm that made you getting to the egg, however, was in the interval [0.000000001, 0.00000002]. This, by the way, means the probability of this particular combination of unique human beings alive today is somewhere around 1e^(-1.28e^11) - that is a "0." followed by approximately 128 billion zeros before you hit another number. The probability is so small that writing it out at one digit per second, without sleeping, would take approximately 4000 years.
And yet here we all are.
Don't make the mistake of thinking that any of that actually means anything beyond what it literally says.
Building a billion dollar company is about knowing what others don't know.
If it were simply a matter of knowing what others don't someone would have already beat you to it.
Very inspirational for my side project, AutoMicroFarm (http://automicrofarm.com). One thing my co-founder and I will do this week is break down the problem we're solving into known unknowns, and figure out a way to get them into the "known" category quickly and efficiently, so we can "grind and innovate" faster/cheaper.
Very much off-topic, but he's an anomaly in many ways...eg, I was incredibly amazed to learn that he and his former wife had twins and triplets. Wonder what the chances of that are. :)
"Get place and wealth, if possible with grace; If not, by any means get wealth and place." --Alexander Pope
I'd actually posit that saying you're going to jump off a plane has a lot more meaning than saying you're a serial entrepreneur. At least most folks have a grasp of what it means to literally jump off of an airplane.
That's .03%. Assuming you start from some whole number of percentage ownership, it's almost impossible to get diluted that low. You would need something like 10 rounds of 50% dilution.
Am I the only one surprised by this?