3 ms·

My first piece of advice for startup job seekers is that equity, all things equal, you can’t pick ‘em. On a risk-adjusted basis, startups are likely to be about

My first piece of advice for startup job seekers is that equity, all things equal, you can’t pick ‘em. On a risk-adjusted basis, startups are likely to be about the same. If there is information that a company has significantly de-risked, it will be priced in. Despite the market often being very wrong, you are unlikely to outsmart it. I don’t understand the argument for this. Isn’t the whole basis of venture investment being able to identify business that will return above the risk-adjusted return? Given many investors lack the technical understanding to know a good risk from a bad one how could this be priced in?

lwhalen 11y ago
It can't, hence why it's gambling when you get down to brass tacks.
- danieltillett 11y ago
  This would imply the market for startups is perfectly efficient which I find hard to believe based on my experience.
  - potatolicious 11y ago
    No, but it does mean that at an individual level the difference is not consequential. a16z and Sequoia might be able to pick the winners at a higher rate than other investors, but that advantage only bears itself out with a large N of companies. At the individual case, with a single individual looking for a single job in a single company, the difference between being to pick winners 5% better than the baseline is not consequential, since the expected outcome is still "not a winner". Some people may be able to pick winners better than others - but the effect is not strong enough to be useful in the micro scale because the odds of success are still very, very low.
    - danieltillett 11y ago
      There is something not right about this argument. Do you really say to yourself: “Here are two companies A & B with the same valuation. I think A has the best chance of success based on its technology, but I don’t care which one I join since they have the same chance of success.”
      - logn 11y ago
        For the engineer, they may be able to choose wisely between company A and B. But if company A has a 1% chance of getting rich and company B has a 5% chance, it's still only a 5% chance. So any skill in choosing a winner is diminished by the fact that winning is still unlikely. VC's however, can place many bets and come out winning if they play enough. Because this is all high variance, a large sample size favors those with skill. Small sample size favors luck.
        danieltillett 11y ago
        Because an engineer will work at many startups over his career these seemingly small differences add up. Let assume the chance of not hitting the jackpot is 99% at companies like A and 95% at companies like B. After working at 10 companies you would have a 10% of hitting the jackpot following the company A path and 40% if you go down the company B path. This is pretty significant.
        deleted 11y ago
        [deleted]
        sethammons 11y ago
        I think a 5% chance of winning is unrealistic for your math, at least without considering payout. Tie the results to the payout and the expected value should show that working at a start up with the idea of making money via equity is foolish compared to Big Co. Let's take that 1% one and say you get $500k if it works out in an IPO. And let's say you take a salary below market of $30k. It will take the start up 7 to 10 years to IPO. You gave up maybe $300k for the chance at $500k. Or the 5% case where the company exits early and everyone gets $100k. Maybe that takes 3 years. You gave up perhaps $90k for a chance at $100k. You can play start up lottery several times in your career, but equity, unless you are getting a very significant portion, should not be a large factor in choosing the start up you work for. Base salary, the environment, culture, learning opportunities, and the ability to make a difference in an organization are reasons to choose a start up. Just not equity. And that's ok :)
w1ntermute 11y ago
> Isn’t the whole basis of venture investment being able to identify business that will return above the risk-adjusted return? No, it's to generate proprietary deal flow by building a brand for your firm. YC has done this with HN and pg's essays, while a16z has done this with Marc Andreessen's incessant tweeting and all the blogging by Chris Dixon, Ben Evans, et al. At this point, YC's/a16z's success has become self-perpetuating - the best founders/companies will apply to YC and pick a16z over other VCs, the best employees will join companies backed by YC/a16z, etc. It's no different from institutions like McKinsey or Harvard.
- danieltillett 11y ago
  Sure, but they still have to pick the above average companies. Even if they don’t pick them and just them picking them means the company has a better chance of success then average then you should be picking companies that YC/a16z will like.
  - w1ntermute 11y ago
    The difficulty isn't in identifying the above average companies, it's in getting them to take your money. Given how little money it takes to get to an MVP these days, most companies backed by the top VC firms already have significant traction, or the founders have a prior success, pedigree, connections, etc. > you should be picking companies that YC/a16z will like. Just look up any of the articles on YC's demo days - you've got dumb money coming out of the woodwork from all over the world, trying to get a piece of the action.
onion2k 11y ago
Isn’t the whole basis of venture investment being able to identify business that will return above the risk-adjusted return? Yes, but as a VC you can offset that risk by investing in a range of startups - 9 out of 10 will fail, but the 1 that succeeds will pay for the rest plus a profit. Plus VCs have teams of researchers and analysts to inform them, and they expect the startups themselves to offer some evidence that they can win despite the risk. You can't really offset the risk in your career because you can only work for one company at a time, and won't have access to the same information about markets and competition as a VC. For you the chance of the startup you choose to work in succeeding is basically the same as any other, although you do get to directly affect it's chances by working hard.
- danieltillett 11y ago
  Sure you only get to work at one company at a time, but over a career you are effectively investing in multiple startups and are in the same boat as a good VC. Pick wisely and you are much more likely to retire with money than choosing unwisely.
  - dragonwriter 11y ago
    Over a career, you don't get that many swings at the startup employment piñata; you aren't in anything like the boat a good VC is in if you aren't investing in several in parallel rather than in series.

lwhalen 11y ago

It can't, hence why it's gambling when you get down to brass tacks.

danieltillett 11y ago
This would imply the market for startups is perfectly efficient which I find hard to believe based on my experience.
- potatolicious 11y ago
  No, but it does mean that at an individual level the difference is not consequential. a16z and Sequoia might be able to pick the winners at a higher rate than other investors, but that advantage only bears itself out with a large N of companies. At the individual case, with a single individual looking for a single job in a single company, the difference between being to pick winners 5% better than the baseline is not consequential, since the expected outcome is still "not a winner". Some people may be able to pick winners better than others - but the effect is not strong enough to be useful in the micro scale because the odds of success are still very, very low.
  - danieltillett 11y ago
    There is something not right about this argument. Do you really say to yourself: “Here are two companies A & B with the same valuation. I think A has the best chance of success based on its technology, but I don’t care which one I join since they have the same chance of success.”
    - logn 11y ago
      For the engineer, they may be able to choose wisely between company A and B. But if company A has a 1% chance of getting rich and company B has a 5% chance, it's still only a 5% chance. So any skill in choosing a winner is diminished by the fact that winning is still unlikely. VC's however, can place many bets and come out winning if they play enough. Because this is all high variance, a large sample size favors those with skill. Small sample size favors luck.
      - danieltillett 11y ago
        Because an engineer will work at many startups over his career these seemingly small differences add up. Let assume the chance of not hitting the jackpot is 99% at companies like A and 95% at companies like B. After working at 10 companies you would have a 10% of hitting the jackpot following the company A path and 40% if you go down the company B path. This is pretty significant.
        deleted 11y ago
        [deleted]
        sethammons 11y ago
        I think a 5% chance of winning is unrealistic for your math, at least without considering payout. Tie the results to the payout and the expected value should show that working at a start up with the idea of making money via equity is foolish compared to Big Co. Let's take that 1% one and say you get $500k if it works out in an IPO. And let's say you take a salary below market of $30k. It will take the start up 7 to 10 years to IPO. You gave up maybe $300k for the chance at $500k. Or the 5% case where the company exits early and everyone gets $100k. Maybe that takes 3 years. You gave up perhaps $90k for a chance at $100k. You can play start up lottery several times in your career, but equity, unless you are getting a very significant portion, should not be a large factor in choosing the start up you work for. Base salary, the environment, culture, learning opportunities, and the ability to make a difference in an organization are reasons to choose a start up. Just not equity. And that's ok :)

w1ntermute 11y ago

> Isn’t the whole basis of venture investment being able to identify business that will return above the risk-adjusted return? No, it's to generate proprietary deal flow by building a brand for your firm. YC has done this with HN and pg's essays, while a16z has done this with Marc Andreessen's incessant tweeting and all the blogging by Chris Dixon, Ben Evans, et al. At this point, YC's/a16z's success has become self-perpetuating - the best founders/companies will apply to YC and pick a16z over other VCs, the best employees will join companies backed by YC/a16z, etc. It's no different from institutions like McKinsey or Harvard.

danieltillett 11y ago
Sure, but they still have to pick the above average companies. Even if they don’t pick them and just them picking them means the company has a better chance of success then average then you should be picking companies that YC/a16z will like.
- w1ntermute 11y ago
  The difficulty isn't in identifying the above average companies, it's in getting them to take your money. Given how little money it takes to get to an MVP these days, most companies backed by the top VC firms already have significant traction, or the founders have a prior success, pedigree, connections, etc. > you should be picking companies that YC/a16z will like. Just look up any of the articles on YC's demo days - you've got dumb money coming out of the woodwork from all over the world, trying to get a piece of the action.

onion2k 11y ago

Isn’t the whole basis of venture investment being able to identify business that will return above the risk-adjusted return? Yes, but as a VC you can offset that risk by investing in a range of startups - 9 out of 10 will fail, but the 1 that succeeds will pay for the rest plus a profit. Plus VCs have teams of researchers and analysts to inform them, and they expect the startups themselves to offer some evidence that they can win despite the risk. You can't really offset the risk in your career because you can only work for one company at a time, and won't have access to the same information about markets and competition as a VC. For you the chance of the startup you choose to work in succeeding is basically the same as any other, although you do get to directly affect it's chances by working hard.

danieltillett 11y ago
Sure you only get to work at one company at a time, but over a career you are effectively investing in multiple startups and are in the same boat as a good VC. Pick wisely and you are much more likely to retire with money than choosing unwisely.
- dragonwriter 11y ago
  Over a career, you don't get that many swings at the startup employment piñata; you aren't in anything like the boat a good VC is in if you aren't investing in several in parallel rather than in series.