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(I'm the author.) It's not exactly true but it's a decent approximation. Because the investment rate is so low (~1%), and because professional VCs often see 10

(I'm the author.) It's not exactly true but it's a decent approximation. Because the investment rate is so low (~1%), and because professional VCs often see 1000+ pitches per year, red flags are a quick way to allocate time more efficiently. If I see 1000 pitches, 100 might be very strong right off the bat, 200 have promise, and 700 have a number of aspects that would make me reluctant to invest. I will pass on the 700 quickly so that I can focus more on the other 300. If my investment rate were higher -- say 15% -- then I might drill into some of those 700, too. But because it's 1% and there are only so many hours in a year for meetings, if I see a red flag or a few yellow flags in a first meeting, I'll use that as justification to give a quick pass. I think most VCs are similar.

CalChris 10y ago
Same with resumes.
- lpolovets 10y ago
  Exactly! That's a great analogy.
randall 10y ago
This is why YC is such a breath of fresh air for entrepreneurs. VCs aren't bad for this behavior, it's completely rational, but if the big winners look like red flag city initially, a higher investment rate of smaller capital allocations can net better outcomes. (Airbnb / Pebble for the up and downsides) YC's scaling over the last few years w/ sam + pb (and now michael) is a feature that some see as a bug of dilution. 200 companies a year now get extra access to angel money at a minimum, some percentage of which (mine!) likely wouldn't have normal access b/c of red flags.
- dilemma 10y ago
  >VCs aren't bad for this behavior, it's completely rational, but if the big winners look like red flag city initially, a higher investment rate of smaller capital allocations can net better outcomes. And this is one of the reasons why human organizations eventually stagnate and then decline. They get too big so that they have to manage by filtering out those unique opportunities that would have been necessary for their survival.

CalChris 10y ago

Same with resumes.

lpolovets 10y ago
Exactly! That's a great analogy.

randall 10y ago

This is why YC is such a breath of fresh air for entrepreneurs. VCs aren't bad for this behavior, it's completely rational, but if the big winners look like red flag city initially, a higher investment rate of smaller capital allocations can net better outcomes. (Airbnb / Pebble for the up and downsides) YC's scaling over the last few years w/ sam + pb (and now michael) is a feature that some see as a bug of dilution. 200 companies a year now get extra access to angel money at a minimum, some percentage of which (mine!) likely wouldn't have normal access b/c of red flags.

dilemma 10y ago
>VCs aren't bad for this behavior, it's completely rational, but if the big winners look like red flag city initially, a higher investment rate of smaller capital allocations can net better outcomes. And this is one of the reasons why human organizations eventually stagnate and then decline. They get too big so that they have to manage by filtering out those unique opportunities that would have been necessary for their survival.