Why Corporations Could Get Higher Returns Than VCs
rwrld.blogspot.com
rwrld.blogspot.com
The prime candidates for entrepreneurial ventures are actually people in their 30s and 40s. Their startups are less likely to fail and reasonably so. They have more experience than people in their 20s and more drive than people in their 50s. They learned about processes and products and people. But they have one major disadvantage in comparison to the twenty-something crowd: they have so much to lose."
An insightful piece into Daniel Kahneman's life work. I've always had a fascination with his books and what he writes about socio-economics and the paradoxes we see in the shops all around us. If anyone is ever interested in how money is really made, I'd highly recommend reading his books.
Why else would his books be on the reading lists of so many intern / grad banking jobs.
That's a weird conclusion. Let's say I value the mug at $5. Obviously I'm not going to sell it for $5, because the transaction itself is an effort, so I would lose! The opposite for buying, obviously I'm not going to buy a mug for $5 if I think it's worth exactly $5.
The price a rational person is willing to accept for a thing he owns must always be higher than what he values it at.
In a general case, probability of gain is obviously worth less than the same probability of loss, because you need bigger relative return to make up for the loss.
if someone is seeking to sell a mug to me, my perception of its value just went down.
if someone is willing to buy a mug from me, my perception of its value just went up. I might have been intending to throw the mug out before I knew that someone would buy it.
But claiming that people have bad risk management (scenario : do you want the blue pill (risk of death 1/1000 or the red pill (2/1000). People pay upto 200 extra for blue pill. Or will you take part in testing the red pill for FDA (people refuse 50k to take part)
Here you are not comparing loss aversion to a 1/1000 chance - you are comparing "safe and tested pills" versus joining a human drug trial. Even non statisticians can tell we don't know that's a 1/1000 chance
So I do worry about basing predictions about VCs on poorly understood loss aversion from reports of studies that leave much to be desired.
Death is just so final, and such a significantly different force in the lives of humans, that it can't really be compared to anything else.
What I see as the inequivalence is that in the first case, they're gaining a cure either way (if it doesn't kill them). (Although it doesn't say what would be cured - I wonder whether most people assumed a terminal illness vs. some minor ailment?) But in the second scenario, they're not gaining anything but the money. So it becomes a 99.9% chance of curing something that you want to cure (possibly terminal) vs a 0.1% chance of dying for nothing but money when you weren't even sick.
I wonder if death isn't the biggest skew though. When pharmaceuticals are mentioned, I think of weight loss, impotence, and cosmetics industries. It would be interesting to see the outcome of replicating the experiment for each of those compared to actual industry profits of each. If a group of people pay more to try to be attractive than they do to delay death, would their experimental responses to risk match the observed facts of their actual behavior? Are most people acting irrationally (in the Economics sense)? And if so, what would that tell us about the risk studies?
Similarly in life: For some events in life, there's just no time to recover afterwards.
That's why companies like Google do 10% time right? And didn't someone recently say Valve kinda does 100% time, everyone has the freedom to work on the project they find interesting.
If a manager prevents you from doing a 20% project, we're instructed to get in touch with... someone, I forget who but there is a route of escalation.
"Google gets rid of 20% time" makes a good headline. "Google revises peer evaluation incentive structure to effectively penalize employees for actually using their 20% time" doesn't, but 20% time is just as dead either way.
It must be strange to work at Google. To have people who have never worked there argue and disagree with your experience.
Some managers are supportive and want their reports to succeed and will encourage them to direct their own work. Some are not. Google's great if you get a good manager. It sucks if you don't. Not much of a different story than in other companies.
"20% time" means that if you do a skunk-works project and it succeeds (which is hard to do-- because Google places high demands in terms of reliability and internationalization before it allows a launch, and for good reasons-- if you're only giving it 8 hours per week, so most people whose projects succeed will "cheat" a little bit) that you don't have to apologize and won't get fired for the mere fact of having a side project. That's important, but the idea that average Googlers get 1/5 of their working time to devote to anything that helps the company is a myth.
However, in US information technology, from all I've been able to see from looking at the biographies of hundreds of US VCs, only a few in the whole country have much expertise in anything technical, in any market in business, or anything beyond general management, marketing, legal, or finance.
So such VCs are not in a position to evaluate projects except in terms of 'traction' or accounting results or just a little of team or founder personality.
To be more clear, large and crucial parts of US culture are really good at evaluating projects just on paper; such parts include Ph.D. committees, editorial staffs of leading peer-reviewed journals of original research in STEM fields, the NSF, NIH, and DARPA, and many corporations with their expertise in their markets -- GM can evaluate essentially anything having to do with cars and trucks; Exxon for oil; Boeing for airplanes; GE for airplane engines; Intel for microelectronics; etc.
So, net, in information technology, generally corporations have much more expertise to evaluate projects than do VCs.
For a more general reason, in recent years, on average the return on investment (RoI) of US VCs has been poor, and evidence is in, say:
http://www.avc.com/a_vc/2013/02/venture-capital-returns.html...
http://www.kauffman.org/newsroom/2012/07/institutional-limit...
We have to suspect that, on pursuing new projects, generally corporations do better than the record of VCs.
However, the VC investors have to share the winnings with the founders, while the large corporations get to keep basically all of it. Oh, sure, the corporation might pay out bonuses and promotions, but this is a small fraction compared to what startup founders get to keep.
Thus, VC investors start out with a built-in disadvantage that they have to overcome: call it "founder drag." It's sort of like the race between active funds and index funds. The actively-managed funds have to overcome their higher expense ratio just to get back to even.
Resources are basically not a big issue for big players. It's their DNA and abilities derived that set what they are not able to achieve.
I don't buy this. For a young person, a 0.1% chance of death is years' worth of death risk. However, I think there's a way to "trick" people into a result like this. Say that Pill A has a 99.9% chance of delivering a cure, and Pill B has a 100% chance of curing them. First, "99.9%" sounds very good already, and "100%" sets off our bullshit detectors because almost nothing in medicine always works. The 99.9 figure is more precise and therefore more impressive.
Furthermore, there's a difference between (a) the pill itself kills in 0.1% of chances vs. (b) it's 99.9% efficacious. In (b), you can take the cheap medicine and try the expensive one if the cheap one does work. As for (a), that's not something we really face because no drug that kills 0.1% of patients at normal doses would be on the market. If it were used at all, it'd be restricted to hospitals and used only when the disease was severe enough to merit it (e.g. cancer drugs).
The prime candidates for entrepreneurial ventures are actually people in their 30s and 40s. Their startups are less likely to fail and reasonably so. They have more experience than people in their 20s and more drive than people in their 50s.
Adverse selection. Most 50+ who have their shit together don't want to deal with VCs and their bullshit. There are plenty of driven, 50+ year old entrepreneurs, but they're not interested in VC. Also, they aren't interested in get-big-or-die gambits in general because getting back into the careers they left, at that age, is just much harder.
This suggests that corporations have a great deal to make by offering entrepreneurial opportunities to their employees.
I don't think that the concept of an "intrapreneur"-- except at a small number of companies like Valve (which only has a few hundred employees)-- has legs. Would Google or Microsoft or Citibank allow it if everyone wanted to be an "intrapreneur"?
While the intrapreneur path will involve a lower risk of financial loss (because it requires no capital investment, except opportunity cost in the willingness to take a lower salary and a more interesting job) it probably has a higher per-month job-loss risk. Employees can avoid behaviors that will make them enemies. They can choose not to give a fuck when it isn't their turn to give a fuck. Intrapreneurs don't have that liberty. They have to fight battles, work hard enough that they lose social polish, and (if their managers aren't supportive) navigate a conflict of interest between their personal project and their assigned work. They can easily turn into overperformers and get themselves fired. Moreover, I don't think that the sociological issues that are in play here are going to go away easily.
None of this refutes the title itself, as presented:
Why Corporations Could Get Higher Returns Than VCs
In fact, they already do. But that's another story entirely.