15 ms·

I think this bias is mistaken--because VC's use their network as a filter, it falsely equivocates strong business/strong founder with individuals who landed on

by ericb 9y ago

I think this bias is mistaken--because VC's use their network as a filter, it falsely equivocates strong business/strong founder with individuals who landed on a social graph that happened to have VC connections. Biases like this are market inefficiencies that can provide outsize returns for those who learn to look past it.

prostoalex 9y ago
In order to fight that bias, a startup would need to turn down a check from a big VC name (Sequoia, a16z, KPCB, Benchmark) and choose crowdfunding. Until that happens, the implicit assumptions is that the startup tried shopping itself around to first-tier VCs and angels, failed, tried to go to second-tier VCs and angels, failed, so crowdfunding is their last resort. Alternatively, a crowdfunded startup scorned by VCs needs to make a really nice exit or achieve a very impressive unicorn valuation.
hkmurakami 9y ago
It's basically a filter that tolerates false negatives. Figuring out a way to create that VC/Angel connection implies abilities and characteristics that they pattern match to past success. There may be high potential teams that cannot pass this filter but will still succeed, but the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more, especially when you consider VC math needing 100x-1000x return potential from each of their companies. It's just like the FaceGooAmaSoft hiring filter we're familiar with that is designed to prioritize low false positives at the cost of having a higher false negative. (skilled programmers who aren't interested in the contrived coding quizzes or can't do them well will be a false negative in the hiring process)
- xiaoma 9y ago
  >"the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more" This is backwards. Funding a company that goes nowhere is far smaller an error than turning down the next SpaceX.
  - hkmurakami 9y ago
    A fund only has 10~20 bets it can make though. That likely influences the human decision making (could still be suboptimal). Afterall didn't A16Z catch some criticism for not investing a large enough sum into Instagram (which iirc had 500x returns or something) to make a large enough difference to the fund?
    - ericb 9y ago
      True, but is "my buddies' buddies" the smartest filter you can apply to increase the chances of finding a company that can return the fund?
    - ryandamm 9y ago
      A16Z didn't invest more in Instagram because of a portfolio conflict; they had already invested in Picplz, and decided they couldn't continue to back Instagram (which was Brbn, a social check-in app, when they invested). A costly adherence to their own ethical rules, but it reinforces how seriously Andreessen Horowitz takes portfolio conflict. source: https://bits.blogs.nytimes.com/2012/04/20/how-andreessen-horowitz-fumbled-an-instagram-investment/ https://bits.blogs.nytimes.com/2012/04/20/how-andreessen-hor...
- ericb 9y ago
  I totally agree. One could argue that one way to view the value proposition of YC from a VC perspective is that they apply a smarter filter than "the buddy system."

by ericb 9y ago

prostoalex 9y ago

In order to fight that bias, a startup would need to turn down a check from a big VC name (Sequoia, a16z, KPCB, Benchmark) and choose crowdfunding. Until that happens, the implicit assumptions is that the startup tried shopping itself around to first-tier VCs and angels, failed, tried to go to second-tier VCs and angels, failed, so crowdfunding is their last resort. Alternatively, a crowdfunded startup scorned by VCs needs to make a really nice exit or achieve a very impressive unicorn valuation.

hkmurakami 9y ago

It's basically a filter that tolerates false negatives. Figuring out a way to create that VC/Angel connection implies abilities and characteristics that they pattern match to past success. There may be high potential teams that cannot pass this filter but will still succeed, but the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more, especially when you consider VC math needing 100x-1000x return potential from each of their companies. It's just like the FaceGooAmaSoft hiring filter we're familiar with that is designed to prioritize low false positives at the cost of having a higher false negative. (skilled programmers who aren't interested in the contrived coding quizzes or can't do them well will be a false negative in the hiring process)

xiaoma 9y ago
>"the industry's deal flow is large enough that they are fine with a small number of false negatives since false positives in their portfolio hurt more" This is backwards. Funding a company that goes nowhere is far smaller an error than turning down the next SpaceX.
- hkmurakami 9y ago
  A fund only has 10~20 bets it can make though. That likely influences the human decision making (could still be suboptimal). Afterall didn't A16Z catch some criticism for not investing a large enough sum into Instagram (which iirc had 500x returns or something) to make a large enough difference to the fund?
  - ericb 9y ago
    True, but is "my buddies' buddies" the smartest filter you can apply to increase the chances of finding a company that can return the fund?
  - ryandamm 9y ago
    A16Z didn't invest more in Instagram because of a portfolio conflict; they had already invested in Picplz, and decided they couldn't continue to back Instagram (which was Brbn, a social check-in app, when they invested). A costly adherence to their own ethical rules, but it reinforces how seriously Andreessen Horowitz takes portfolio conflict. source: https://bits.blogs.nytimes.com/2012/04/20/how-andreessen-horowitz-fumbled-an-instagram-investment/ https://bits.blogs.nytimes.com/2012/04/20/how-andreessen-hor...
ericb 9y ago
I totally agree. One could argue that one way to view the value proposition of YC from a VC perspective is that they apply a smarter filter than "the buddy system."