7 ms·

> only invest in companies that have the potential to return the value of the entire fund I have a feeling this is much, much easier said than done. How do you

by dean 11y ago

> only invest in companies that have the potential to return the value of the entire fund I have a feeling this is much, much easier said than done. How do you even determine "potential" of a startup, when, according to Paul Graham, "the best ideas look initially like bad ideas".

CptJamesCook 11y ago
Of course. After all, Fred Wilson refused to invest in airbnb even when Paul Graham begged him to.
deleted 11y ago
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skewart 11y ago
It's incredibly hard to identify successful companies early on. But following Thiel's rule isn't actually all that hard. The key is to look at the total addressible market for a company or product. It has to be large, or growing quickly, or both. For example, AirBnB might have looked like a bad idea, but the hospitality market is huge, so if it did work out then they could grow to become a giant company. On the other hand, you could create a transformative product for blind people, and build a business around it that makes you a multi-millionaire. But VCs will never invest in your company because there just isn't a big enough market. You might 3x or 5x an investment but you'll never deliver the kinds of giant returns VCs need in order to make their LPs happy. Of course, I'm talking about traditional VC firms - like the one the blog post's author runs. There are all kinds of investors out there with different motivations.
- addicted 11y ago
  When Facebook came around, wouldnt the addressable market have looked tiny? Basically US based college campuses. Or was Zuckerberg already envisioning opening it up and spreading it far beyond college (and maybe high school) campuses?
  - skewart 11y ago
    I don't know what the conversations around FB's early investment were like, or if expanding to a billion users was always part of the plan. My understanding is that very early on (i.e. the first six to nine months after it started) they wanted to be a kind of information hub for school campuses, with course listings and whatnot. Even if that's true and they pitched investors on a kind of online campus hub for students, they woukd still have been going after a pretty big market - they could sell software/functionality to schools and/or they could sell advertising (reaching young people is quite valuable for brands since young people tend to have less fixed opinions and loyalties as consumers). It may well be that investors thought it could grow to compete with MySpace. Others might have just thought being an essential part of every student's life would be a good enough outcome. (After all, there's plenty of VC in "ed tech" these days).
  - w1ntermute 11y ago
    Peter Thiel said recently in an interview[0] that when he made his initial $500K investment in Facebook at a $5M valuation in September 2004, he thought it would be big on college campuses, but didn't anticipate how successful it would actually become. 0: https://www.youtube.com/watch?v=ryFB6mvy4uE#t=3m18s https://www.youtube.com/watch?v=ryFB6mvy4uE#t=3m18s
  - morgante 11y ago
    The hub for all college students is actually a pretty big addressable market. It's certainly not as big as Facebook ended up being, but it's still big enough to interest VCs.
  - mahyarm 11y ago
    Another thing about startups I've realized is you want to start with something small, but you could also see being expanded further. For example, snapchat started with LA teenagers. Facebook started with harvard, then ivy league colleges, etc. Uber was licenced black car services in SF only at first, etc.
    - tedmiston 11y ago
      Always. And it's funny - the startups that try to start with "we're revolutionizing the world" end up over-promising. The ones like you mentioned actually do. Not only just in starting in one market, but focusing on one customer segment, or one feature, or one vertical.
- defen 11y ago
  > But following Thiel's rule isn't actually all that hard. > The key is to look at the total addressible market for a company or product. It has to be large, or growing quickly, or both. For example, AirBnB might have looked like a bad idea, but the hospitality market is huge, so if it did work out then they could grow to become a giant company. Again, this just feels like post-hoc rationalization. The guy who wrote this blog post declined to invest in AirBnB despite Paul Graham himself practically begging him to. So maybe it actually is hard?
  - skewart 11y ago
    Just because he decided not to invest doesn't mean he didn't think AirBnB had the potential to become big. It doesn't mean he didn't think they were going after a big market. He might have just thought the team wasn't very good, or the product wasn't quite right, or any of the other reasons investors pass on companies. The potential was there, but it just wasn't very likely given the details of the company. I think what Thiel is getting at with his rule is to not bother with companies that don't have the potential to ever get huge, given their product and market. That rules out a huge number of businesses, so following it prevents you from wasting a lot of time.
- tedmiston 11y ago
  > ... build a business around it that makes you a multi-millionaire. But VCs will never invest in your company because there just isn't a big enough market. You might 3x or 5x an investment but you'll never deliver the kinds of giant returns VCs need in order to make their LPs happy. Ah, a lifestyle business. Just kidding -- I'm a fan. I found PG's take on them in the footnote of Black Swan Farming (http://paulgraham.com/swan.html http://paulgraham.com/swan.html) refreshing: > Nor do we push founders to try to become one of the big winners if they don't want to. We didn't "swing for the fences" in our own startup (Viaweb, which was acquired for $50 million), and it would feel pretty bogus to press founders to do something we didn't do. Our rule is that it's up to the founders. Some want to take over the world, and some just want that first few million. But we invest in so many companies that we don't have to sweat any one outcome. In fact, we don't have to sweat whether startups have exits at all. The biggest exits are the only ones that matter financially, and those are guaranteed in the sense that if a company becomes big enough, a market for its shares will inevitably arise. Since the remaining outcomes don't have a significant effect on returns, it's cool with us if the founders want to sell early for a small amount, or grow slowly and never sell (i.e. become a so-called lifestyle business), or even shut the company down. We're sometimes disappointed when a startup we had high hopes for doesn't do well, but this disappointment is mostly the ordinary variety that anyone feels when that happens.
  - deleted 11y ago
    [deleted]
pj_mukh 11y ago
YC (for example) works around this problem by investing in founders, judging for perseverance and hunger. Most other firms probably have similar strategies.
deleted 11y ago
[deleted]
gist 11y ago
> "the best ideas look initially like bad ideas" And they look even worse to those of us in the peanut gallery (and the pundits) who don't have access to all of the facts that someone who is actually investing has. They at least have answer to questions. A bit like investing at a higher level in the stock market (and taking major positions which often allows you to glean info from people that work at the company).
deleted 11y ago
[deleted]

by dean 11y ago

CptJamesCook 11y ago

Of course. After all, Fred Wilson refused to invest in airbnb even when Paul Graham begged him to.

deleted 11y ago

[deleted]

skewart 11y ago

It's incredibly hard to identify successful companies early on. But following Thiel's rule isn't actually all that hard. The key is to look at the total addressible market for a company or product. It has to be large, or growing quickly, or both. For example, AirBnB might have looked like a bad idea, but the hospitality market is huge, so if it did work out then they could grow to become a giant company. On the other hand, you could create a transformative product for blind people, and build a business around it that makes you a multi-millionaire. But VCs will never invest in your company because there just isn't a big enough market. You might 3x or 5x an investment but you'll never deliver the kinds of giant returns VCs need in order to make their LPs happy. Of course, I'm talking about traditional VC firms - like the one the blog post's author runs. There are all kinds of investors out there with different motivations.

addicted 11y ago
When Facebook came around, wouldnt the addressable market have looked tiny? Basically US based college campuses. Or was Zuckerberg already envisioning opening it up and spreading it far beyond college (and maybe high school) campuses?
- skewart 11y ago
  I don't know what the conversations around FB's early investment were like, or if expanding to a billion users was always part of the plan. My understanding is that very early on (i.e. the first six to nine months after it started) they wanted to be a kind of information hub for school campuses, with course listings and whatnot. Even if that's true and they pitched investors on a kind of online campus hub for students, they woukd still have been going after a pretty big market - they could sell software/functionality to schools and/or they could sell advertising (reaching young people is quite valuable for brands since young people tend to have less fixed opinions and loyalties as consumers). It may well be that investors thought it could grow to compete with MySpace. Others might have just thought being an essential part of every student's life would be a good enough outcome. (After all, there's plenty of VC in "ed tech" these days).
- w1ntermute 11y ago
  Peter Thiel said recently in an interview[0] that when he made his initial $500K investment in Facebook at a $5M valuation in September 2004, he thought it would be big on college campuses, but didn't anticipate how successful it would actually become. 0: https://www.youtube.com/watch?v=ryFB6mvy4uE#t=3m18s https://www.youtube.com/watch?v=ryFB6mvy4uE#t=3m18s
- morgante 11y ago
  The hub for all college students is actually a pretty big addressable market. It's certainly not as big as Facebook ended up being, but it's still big enough to interest VCs.
- mahyarm 11y ago
  Another thing about startups I've realized is you want to start with something small, but you could also see being expanded further. For example, snapchat started with LA teenagers. Facebook started with harvard, then ivy league colleges, etc. Uber was licenced black car services in SF only at first, etc.
  - tedmiston 11y ago
    Always. And it's funny - the startups that try to start with "we're revolutionizing the world" end up over-promising. The ones like you mentioned actually do. Not only just in starting in one market, but focusing on one customer segment, or one feature, or one vertical.
defen 11y ago
> But following Thiel's rule isn't actually all that hard. > The key is to look at the total addressible market for a company or product. It has to be large, or growing quickly, or both. For example, AirBnB might have looked like a bad idea, but the hospitality market is huge, so if it did work out then they could grow to become a giant company. Again, this just feels like post-hoc rationalization. The guy who wrote this blog post declined to invest in AirBnB despite Paul Graham himself practically begging him to. So maybe it actually is hard?
- skewart 11y ago
  Just because he decided not to invest doesn't mean he didn't think AirBnB had the potential to become big. It doesn't mean he didn't think they were going after a big market. He might have just thought the team wasn't very good, or the product wasn't quite right, or any of the other reasons investors pass on companies. The potential was there, but it just wasn't very likely given the details of the company. I think what Thiel is getting at with his rule is to not bother with companies that don't have the potential to ever get huge, given their product and market. That rules out a huge number of businesses, so following it prevents you from wasting a lot of time.
tedmiston 11y ago
> ... build a business around it that makes you a multi-millionaire. But VCs will never invest in your company because there just isn't a big enough market. You might 3x or 5x an investment but you'll never deliver the kinds of giant returns VCs need in order to make their LPs happy. Ah, a lifestyle business. Just kidding -- I'm a fan. I found PG's take on them in the footnote of Black Swan Farming (http://paulgraham.com/swan.html http://paulgraham.com/swan.html) refreshing: > Nor do we push founders to try to become one of the big winners if they don't want to. We didn't "swing for the fences" in our own startup (Viaweb, which was acquired for $50 million), and it would feel pretty bogus to press founders to do something we didn't do. Our rule is that it's up to the founders. Some want to take over the world, and some just want that first few million. But we invest in so many companies that we don't have to sweat any one outcome. In fact, we don't have to sweat whether startups have exits at all. The biggest exits are the only ones that matter financially, and those are guaranteed in the sense that if a company becomes big enough, a market for its shares will inevitably arise. Since the remaining outcomes don't have a significant effect on returns, it's cool with us if the founders want to sell early for a small amount, or grow slowly and never sell (i.e. become a so-called lifestyle business), or even shut the company down. We're sometimes disappointed when a startup we had high hopes for doesn't do well, but this disappointment is mostly the ordinary variety that anyone feels when that happens.
- deleted 11y ago
  [deleted]

pj_mukh 11y ago

YC (for example) works around this problem by investing in founders, judging for perseverance and hunger. Most other firms probably have similar strategies.

deleted 11y ago

[deleted]

gist 11y ago

> "the best ideas look initially like bad ideas" And they look even worse to those of us in the peanut gallery (and the pundits) who don't have access to all of the facts that someone who is actually investing has. They at least have answer to questions. A bit like investing at a higher level in the stock market (and taking major positions which often allows you to glean info from people that work at the company).

deleted 11y ago

[deleted]