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So, honest question... What is stopping a government- or non-profit-run VC firm from investing pretty much randomly, where all of the lottery winnings go right

So, honest question... What is stopping a government- or non-profit-run VC firm from investing pretty much randomly, where all of the lottery winnings go right back into the fund? Or does randomized investing not put out a net win in the end? Including companies that really go on to make billions, I would think something like this would be sustainable. But again, I have no idea. It just seems like it would be worthwhile to have an investment machine which didn't need to pay for someone's megayacht in the process of reaping returns and investing that money in even more companies.

Retric 10y ago
Wall-street/VC's is focused on convincing people and well funded organizations to part with their money. Thus they need to be able to talk up their choices. Even if it's just "we only employ people from MIT and Harvard so can trust us." But, everyone does that so they really want to be able to say: "I had the foresight to invest in Google so you should trust my judgement." That said, they could also just randomly choose without telling anyone and justify actions after the fact. But, as you might guess nobody who does that is going to say they did it that way. The basic problem is if your going to randomly pick then why should I pay you anything? PS: One fund did chose to fund every YC company which is close to a random choice.
- fapjacks 10y ago
  Just to throw something back to your question: Because you showed that randomized investing is a net win, and that your randomization methods are robust. Of course I'm still very curious if this is the case about randomized investing being a net win (though my instinct is that investing in startups is no different than investing in the stock market, and therefore at least as good as randomly investing, because no one has a crystal ball). But if you can just literally show people the numbers... "Hey, put $50k in the pot, X years later, you get $85k out." Or whatever, of course. I just think it would be worthwhile -- seeing that the government already does invest in the stock market -- for the same to feed startups.
  - Retric 10y ago
    As someone else said, you want some vetting to avoid obvious scams. But, in terms of picking the 'best' 5 out of 10 when it's going to take a lot of effort. Alternatively, a common approach when getting a lot of applications is to simply randomly look at half and ignore the other half unless you can't find enough good options. So, in the real world you would be able to talk up various points. However, I don't think you can convince a politician to use your random methods unless he can sneak a few choices in.
Rylinks 10y ago
Random selection might work right now, because all the candidates are pretty good. But, if you announce that you are selecting randomly, it screws up the incentives. If everyone knows that you are selecting randomly, people will apply without any thought or skill, just to pay themselves a salary for a few years.
- fapjacks 10y ago
  Well, I'm not saying give the money to anyone who can fill out a form. Just because it's run by the government, doesn't mean it has to be completely inefficient or only feed abuse of the system. Banks have people that look over small business loan applications. There's no reason you couldn't hire someone just like that to work the door to the startup investment club.
- cbhl 10y ago
  I imagine people already apply without any thought or skill, due to the Dunning–Kruger effect.
jfno67 10y ago
Beating random doesn't mean making a return. A lot of VC plainly and simply lose money.
derefr 10y ago
This happened! In Nigeria, of all places. http://www.npr.org/sections/money/2016/05/20/478883658/episode-702-nigeria-you-win http://www.npr.org/sections/money/2016/05/20/478883658/episo...
- tim333 10y ago
  I had a listen to that. It was interesting but not really investing, more just giving grants without asking for a return. It seemed to work for job creation though http://chrisblattman.com/2015/09/24/is-this-the-most-effective-development-program-in-history/ http://chrisblattman.com/2015/09/24/is-this-the-most-effecti...

Retric 10y ago

Wall-street/VC's is focused on convincing people and well funded organizations to part with their money. Thus they need to be able to talk up their choices. Even if it's just "we only employ people from MIT and Harvard so can trust us." But, everyone does that so they really want to be able to say: "I had the foresight to invest in Google so you should trust my judgement." That said, they could also just randomly choose without telling anyone and justify actions after the fact. But, as you might guess nobody who does that is going to say they did it that way. The basic problem is if your going to randomly pick then why should I pay you anything? PS: One fund did chose to fund every YC company which is close to a random choice.

fapjacks 10y ago
Just to throw something back to your question: Because you showed that randomized investing is a net win, and that your randomization methods are robust. Of course I'm still very curious if this is the case about randomized investing being a net win (though my instinct is that investing in startups is no different than investing in the stock market, and therefore at least as good as randomly investing, because no one has a crystal ball). But if you can just literally show people the numbers... "Hey, put $50k in the pot, X years later, you get $85k out." Or whatever, of course. I just think it would be worthwhile -- seeing that the government already does invest in the stock market -- for the same to feed startups.
- Retric 10y ago
  As someone else said, you want some vetting to avoid obvious scams. But, in terms of picking the 'best' 5 out of 10 when it's going to take a lot of effort. Alternatively, a common approach when getting a lot of applications is to simply randomly look at half and ignore the other half unless you can't find enough good options. So, in the real world you would be able to talk up various points. However, I don't think you can convince a politician to use your random methods unless he can sneak a few choices in.

Rylinks 10y ago

Random selection might work right now, because all the candidates are pretty good. But, if you announce that you are selecting randomly, it screws up the incentives. If everyone knows that you are selecting randomly, people will apply without any thought or skill, just to pay themselves a salary for a few years.

fapjacks 10y ago
Well, I'm not saying give the money to anyone who can fill out a form. Just because it's run by the government, doesn't mean it has to be completely inefficient or only feed abuse of the system. Banks have people that look over small business loan applications. There's no reason you couldn't hire someone just like that to work the door to the startup investment club.
cbhl 10y ago
I imagine people already apply without any thought or skill, due to the Dunning–Kruger effect.

jfno67 10y ago

Beating random doesn't mean making a return. A lot of VC plainly and simply lose money.

derefr 10y ago

This happened! In Nigeria, of all places. http://www.npr.org/sections/money/2016/05/20/478883658/episode-702-nigeria-you-win http://www.npr.org/sections/money/2016/05/20/478883658/episo...

tim333 10y ago
I had a listen to that. It was interesting but not really investing, more just giving grants without asking for a return. It seemed to work for job creation though http://chrisblattman.com/2015/09/24/is-this-the-most-effective-development-program-in-history/ http://chrisblattman.com/2015/09/24/is-this-the-most-effecti...