3 ms·

One of the points that Charlie Munger makes in his talk on worldly wisdom (http://ycombinator.com/munger.html http://ycombinator.com/munger.html) is that good i

by dpatru 16y ago

One of the points that Charlie Munger makes in his talk on worldly wisdom (http://ycombinator.com/munger.html http://ycombinator.com/munger.html) is that good investors tend to bet heavily when the odds are grossly in their favor and not bet at all the rest of the time. The teen in this story illustrates how consistent application of this principle yields good results. This is also how Paul Graham operates YCombinator: he carefully evaluates all the investment opportunities that come his way and only bets on the few that seem to him to be particularly good deals. More generally, the key to highly profitable business seems to be to focus on servicing profitable customers.

jacoblyles 16y ago
YCombinator's strategy is better described by Nassim Taleb's "Extremistan" parable. In Extremistan, most of your gains from stock investing happen from the few investments that make you a lot of money. So it's wise to distribute your investments over a large number of small investments, counting on the fact that your winners cover your expenses for your losers. This is the opposite of the small number of large investment strategy.
- dpatru 16y ago
  Relative to the amount of opportunity it has, YC is very selective. According to Business Week, YC's acceptance rate is 4.4% (1). For comparison, Harvard's rate is 6.9% (2). I'm just realizing that besides launching early, working hard, iterating rapidly, listening to your customers, persevering, etc, a big part of success in business seems to be selection: having the discipline and patience to pick the best deals. Deals can involve physical trades (as in the posted article), investments, customers, or even tasks to do. Whatever your process is, a good way to make your outputs above average is to select above-average inputs. It seems obvious that the way to trade up from a phone to a Porsche is to carefully select your trades. It's not so obvious, at least to me, that the way to run a very profitable YCombinator is to carefully select your founders. Simple selection may be more important than locating in Silicon Valley, having regular dinners with great speakers, offering legal and technical help, and introducing investors. When you start off with great entrepreneurs it's not so hard to make them even better. I'm naturally a believer in transformation. * If the trade as advertised is not a good deal, let's negotiate and we'll make it work. * If a person is not a good entrepreneur, that can be fixed with the right training program and environment. * If the product is not right for this customer, we'll add features and cut the price until it is right. * If a person has the wrong political beliefs, what is needed is some good logical argument. This sometimes works, but it is often more efficient to simply look for a better deal: Find someone with a better trade; find someone who's more entrepreneurial, find a customer with more of a need, find a voter who already agrees with you. 1. http://www.businessweek.com/smallbiz/content/sep2007/sb20070926_620433_page_2.htm http://www.businessweek.com/smallbiz/content/sep2007/sb20070.... 2. http://www.thecrimson.com/article/2010/3/31/financial-aid-percent-students/ http://www.thecrimson.com/article/2010/3/31/financial-aid-pe...
  - philwelch 16y ago
    That's more a result of YC's popularity and limited capacity than any desire to be selective. A VC who dicks around with you for months on end and only makes 5 investments a year is selective--YC is just popular.
vannevar 16y ago
At this point in his career, the fact that PG is investing in them is by far the single most valuable thing about any of his startups, much more valuable than their respective business models. The businesses succeed because he invests, he doesn't invest because they succeed. That doesn't mean any business model can succeed with funding, only that once you're funded you've got a lot more flexibility to adapt your business model to the reality of the market you engage and this flexibility makes you much more likely to be successful.
- dpatru 16y ago
  I think YC is on a virtuous spiral. A YC investment increases a candidate's chances of success. This attracts a lot of candidates which enables YC to select the ones that have the greatest chance of succeeding. Which further improves YC's record. Harvard is in a similar situation. A Harvard graduate is impressive because the students selected by Harvard are impressive because a lot of students want to be Harvard graduates. This is why elite schools can give away their curriculum on the Internet. If the content of the curriculum were critical, then top schools would guard it more closely. However, if the best students are already attending, then top schools don't have much to fear from the left-behinds who follow along for free on the Internet. This is an example of something you can't copy. As long as the best high school graduates keep choosing Harvard, Harvard has little to fear from a competitor who meticulously copies its fine classrooms, libraries, and curriculum. Similarly, as long as the best entrepreneurs choose YC, YC would still do well even if all of its dinners were broadcast free on justin.tv.

by dpatru 16y ago

jacoblyles 16y ago

YCombinator's strategy is better described by Nassim Taleb's "Extremistan" parable. In Extremistan, most of your gains from stock investing happen from the few investments that make you a lot of money. So it's wise to distribute your investments over a large number of small investments, counting on the fact that your winners cover your expenses for your losers. This is the opposite of the small number of large investment strategy.

dpatru 16y ago
Relative to the amount of opportunity it has, YC is very selective. According to Business Week, YC's acceptance rate is 4.4% (1). For comparison, Harvard's rate is 6.9% (2). I'm just realizing that besides launching early, working hard, iterating rapidly, listening to your customers, persevering, etc, a big part of success in business seems to be selection: having the discipline and patience to pick the best deals. Deals can involve physical trades (as in the posted article), investments, customers, or even tasks to do. Whatever your process is, a good way to make your outputs above average is to select above-average inputs. It seems obvious that the way to trade up from a phone to a Porsche is to carefully select your trades. It's not so obvious, at least to me, that the way to run a very profitable YCombinator is to carefully select your founders. Simple selection may be more important than locating in Silicon Valley, having regular dinners with great speakers, offering legal and technical help, and introducing investors. When you start off with great entrepreneurs it's not so hard to make them even better. I'm naturally a believer in transformation. * If the trade as advertised is not a good deal, let's negotiate and we'll make it work. * If a person is not a good entrepreneur, that can be fixed with the right training program and environment. * If the product is not right for this customer, we'll add features and cut the price until it is right. * If a person has the wrong political beliefs, what is needed is some good logical argument. This sometimes works, but it is often more efficient to simply look for a better deal: Find someone with a better trade; find someone who's more entrepreneurial, find a customer with more of a need, find a voter who already agrees with you. 1. http://www.businessweek.com/smallbiz/content/sep2007/sb20070926_620433_page_2.htm http://www.businessweek.com/smallbiz/content/sep2007/sb20070.... 2. http://www.thecrimson.com/article/2010/3/31/financial-aid-percent-students/ http://www.thecrimson.com/article/2010/3/31/financial-aid-pe...
- philwelch 16y ago
  That's more a result of YC's popularity and limited capacity than any desire to be selective. A VC who dicks around with you for months on end and only makes 5 investments a year is selective--YC is just popular.

vannevar 16y ago

At this point in his career, the fact that PG is investing in them is by far the single most valuable thing about any of his startups, much more valuable than their respective business models. The businesses succeed because he invests, he doesn't invest because they succeed. That doesn't mean any business model can succeed with funding, only that once you're funded you've got a lot more flexibility to adapt your business model to the reality of the market you engage and this flexibility makes you much more likely to be successful.

dpatru 16y ago
I think YC is on a virtuous spiral. A YC investment increases a candidate's chances of success. This attracts a lot of candidates which enables YC to select the ones that have the greatest chance of succeeding. Which further improves YC's record. Harvard is in a similar situation. A Harvard graduate is impressive because the students selected by Harvard are impressive because a lot of students want to be Harvard graduates. This is why elite schools can give away their curriculum on the Internet. If the content of the curriculum were critical, then top schools would guard it more closely. However, if the best students are already attending, then top schools don't have much to fear from the left-behinds who follow along for free on the Internet. This is an example of something you can't copy. As long as the best high school graduates keep choosing Harvard, Harvard has little to fear from a competitor who meticulously copies its fine classrooms, libraries, and curriculum. Similarly, as long as the best entrepreneurs choose YC, YC would still do well even if all of its dinners were broadcast free on justin.tv.