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Nice app! I have to admit this made me chuckle: > Instead of trying to get the right answer, we set out to build a tool that could get an answer. I'm curious

Nice app! I have to admit this made me chuckle: > Instead of trying to get the right answer, we set out to build a tool that could get an answer. I'm curious though, from where did you get the numbers about the likelihood of an exit? I thought it was pretty interesting that a Series C is statistically less likely to make you money than a Series A, according to this.

bethly 9y ago
Hi! I'm the engineer :) I used two sources of data: https://www.cbinsights.com/blog/venture-capital-funnel-2/ https://www.cbinsights.com/blog/venture-capital-funnel-2/ which was specific to tech companies and http://files.pitchbook.com/pdf/PitchBook_1H_2016_VC_Valuations_Report.pdf http://files.pitchbook.com/pdf/PitchBook_1H_2016_VC_Valuatio... which covered more than just tech companies. Both only consider companies backed by American VCs. Interestingly, data I found from 2010 was very different. It seems like more recently the popularity of early acquisitions (especially in biotech) and more robust seed funding have shifted the distribution of outcomes. It could definitely change again: success rates are by no means consistent.
- toomuchtodo 9y ago
  Serious question: Would you have enough data at this point to tell me how many lottery tickets I could buy to replace the odds of winning on startup options based on option metadata (startup round, options granted, etc)? Think of it as investment diversification.
  - bumbledraven 9y ago
    One way to look at this is with the Kelly Criterion (https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion), which says that in order to maximize the long-term growth rate of your capital, you must maximize the geometric mean of your capital at the end of each decision point. To make this concrete, I'll take CA Powerball as an example. According to http://www.calottery.com/play/draw-games/powerball/faqs http://www.calottery.com/play/draw-games/powerball/faqs , the jackpot starts at $40 milllion, and your odds of winning are 1 in 293 million. For simplicity I will neglect the other (smaller) prizes, and the chance of splitting the jackpot with someone else, taxes, time value of money, etc. Suppose you have $100k in the bank, and tldroptions.io says you have a 20% chance of receiving a $60 million payout. The geometric mean of your capital is then $360k: https://www.wolframalpha.com/input/?i=exp%28.2+log%5B60%2B.1+%5D+%2B+.8+log%5B.1%5D%29 https://www.wolframalpha.com/input/?i=exp%28.2+log%5B60%2B.1... It would take 62 million CA powerball tickets (each with different numbers, in the same drawing) to give the same result: https://www.wolframalpha.com/input/?i=exp((x%2F293000000)*+log%5B40%2B.1+%5D+%2B+(1-x%2F293000000)*+log%5B.1%5D)+%3D+.360+solve+for+x https://www.wolframalpha.com/input/?i=exp((x%2F293000000)*+l...
  - bethly 9y ago
    In the worst case, an option is going to be worth 0 and in the best case it's going to be worth > 0, so the value of an option is always positive until the company actually dies. Lottery tickets, unlike options, cost money up front. You still can't lose more than you pay, so the payoff curve is similarly non-linear, but unless you can trade options for cash options will always beat lottery tickets. Lottery tickets are easy to diversify in that you can buy a variety of numbers. (The times when lotteries have become a net-positive buy the buyers takes advantage of this fact.) Employee startup options are more like buying one set of numbers over and over again. On the other hand, the odds of getting any payoff from options are somewhere around 15-30%, whereas the odds of getting any payoff from a California SuperLotto Plus ticket are ~4.3%. Because you can diversify ticket numbers, you could get the same odds of getting any payoff by buying 14 tickets with different Mega numbers, which would earn you $1 to the $14 you spent. If you could buy stock in many different startups, you would be called a "venture capitalist" and those folks on average do much better than people who play the lottery. Finally, the maximum payout of a lottery ticket is capped and known ahead of time. The largest lottery win in the US was $656 million. On the other hand you don't know going into a startup what the payoff for that particular startup is going to be, and the largest exit of all time was Facebook at $104 billion. Just like with the lottery you don't know how many ways you are splitting the payoff, but unlike the lottery it's going to be based on the decisions of the board/founders, rather than random. Basically, the lottery is a lot simpler than a startup, with few sources of actual uncertainty, and so there's no real risk involved. It is just gambling: you can do the math to figure out what edge the house has and figure out for sure that you shouldn't do it. Startup options, on the other hand, reflect actually-unknown unknowns, and so are more valuable to those who hold more-optimist-than-average beliefs about the probability of that particular startup succeeding.
    - bcbrown 9y ago
      > In the worst case, an option is going to be worth 0 and in the best case it's going to be worth > 0, so the value of an option is always positive until the company actually dies. That's only true as long as you're still working at the company. If you leave, you have to exercise, and then the worst case becomes negative.

bethly 9y ago

Hi! I'm the engineer :) I used two sources of data: https://www.cbinsights.com/blog/venture-capital-funnel-2/ https://www.cbinsights.com/blog/venture-capital-funnel-2/ which was specific to tech companies and http://files.pitchbook.com/pdf/PitchBook_1H_2016_VC_Valuations_Report.pdf http://files.pitchbook.com/pdf/PitchBook_1H_2016_VC_Valuatio... which covered more than just tech companies. Both only consider companies backed by American VCs. Interestingly, data I found from 2010 was very different. It seems like more recently the popularity of early acquisitions (especially in biotech) and more robust seed funding have shifted the distribution of outcomes. It could definitely change again: success rates are by no means consistent.

toomuchtodo 9y ago
Serious question: Would you have enough data at this point to tell me how many lottery tickets I could buy to replace the odds of winning on startup options based on option metadata (startup round, options granted, etc)? Think of it as investment diversification.
- bumbledraven 9y ago
  One way to look at this is with the Kelly Criterion (https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion), which says that in order to maximize the long-term growth rate of your capital, you must maximize the geometric mean of your capital at the end of each decision point. To make this concrete, I'll take CA Powerball as an example. According to http://www.calottery.com/play/draw-games/powerball/faqs http://www.calottery.com/play/draw-games/powerball/faqs , the jackpot starts at $40 milllion, and your odds of winning are 1 in 293 million. For simplicity I will neglect the other (smaller) prizes, and the chance of splitting the jackpot with someone else, taxes, time value of money, etc. Suppose you have $100k in the bank, and tldroptions.io says you have a 20% chance of receiving a $60 million payout. The geometric mean of your capital is then $360k: https://www.wolframalpha.com/input/?i=exp%28.2+log%5B60%2B.1+%5D+%2B+.8+log%5B.1%5D%29 https://www.wolframalpha.com/input/?i=exp%28.2+log%5B60%2B.1... It would take 62 million CA powerball tickets (each with different numbers, in the same drawing) to give the same result: https://www.wolframalpha.com/input/?i=exp((x%2F293000000)*+log%5B40%2B.1+%5D+%2B+(1-x%2F293000000)*+log%5B.1%5D)+%3D+.360+solve+for+x https://www.wolframalpha.com/input/?i=exp((x%2F293000000)*+l...
- bethly 9y ago
  In the worst case, an option is going to be worth 0 and in the best case it's going to be worth > 0, so the value of an option is always positive until the company actually dies. Lottery tickets, unlike options, cost money up front. You still can't lose more than you pay, so the payoff curve is similarly non-linear, but unless you can trade options for cash options will always beat lottery tickets. Lottery tickets are easy to diversify in that you can buy a variety of numbers. (The times when lotteries have become a net-positive buy the buyers takes advantage of this fact.) Employee startup options are more like buying one set of numbers over and over again. On the other hand, the odds of getting any payoff from options are somewhere around 15-30%, whereas the odds of getting any payoff from a California SuperLotto Plus ticket are ~4.3%. Because you can diversify ticket numbers, you could get the same odds of getting any payoff by buying 14 tickets with different Mega numbers, which would earn you $1 to the $14 you spent. If you could buy stock in many different startups, you would be called a "venture capitalist" and those folks on average do much better than people who play the lottery. Finally, the maximum payout of a lottery ticket is capped and known ahead of time. The largest lottery win in the US was $656 million. On the other hand you don't know going into a startup what the payoff for that particular startup is going to be, and the largest exit of all time was Facebook at $104 billion. Just like with the lottery you don't know how many ways you are splitting the payoff, but unlike the lottery it's going to be based on the decisions of the board/founders, rather than random. Basically, the lottery is a lot simpler than a startup, with few sources of actual uncertainty, and so there's no real risk involved. It is just gambling: you can do the math to figure out what edge the house has and figure out for sure that you shouldn't do it. Startup options, on the other hand, reflect actually-unknown unknowns, and so are more valuable to those who hold more-optimist-than-average beliefs about the probability of that particular startup succeeding.
  - bcbrown 9y ago
    > In the worst case, an option is going to be worth 0 and in the best case it's going to be worth > 0, so the value of an option is always positive until the company actually dies. That's only true as long as you're still working at the company. If you leave, you have to exercise, and then the worst case becomes negative.