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“ The spectral signatures of the best companies I’ve invested in are remarkably similar. They usually have most of the following characteristics: compelling fo

“ The spectral signatures of the best companies I’ve invested in are remarkably similar. They usually have most of the following characteristics: compelling founders, a mission that attracts talented people into the startup’s orbit, a product so good that people spontaneously tell their friends about it, a rapidly growing market, a network effect and low marginal costs, the ability to grow fast, and a product that is either fundamentally new or 10x better than existing options. You should try to limit yourself to opportunities that could be $10 billion companies if they work (which means they have, at least, a fast-growing market and some sort of pricing power). The power law is that powerful. This is easy to say and hard to do, and I’ve been guilty of violating the principle many times. But the data are clear—the failures don’t matter much, the small successes don’t matter much, and the giant returns are where everything happens.” This is just one type of company and limiting yourself to just that is limiting and a driver to some of the mind bubble issues in SV.

awb 7y ago
> This is just one type of company and limiting yourself to just that is limiting and a driver to some of the mind bubble issues in SV. I think the idea is that since such a high percentage of startups fail or provide low returns you need to find these huge wins to make money in the long run. And finding one huge win every ~5 years might be easier than finding a bunch of smaller wins every year.
- arcticfox 7y ago
  Right, but that is just one way to do it. In the hypothetical scenario that every investor chased only $10B+ potential companies exclusively, $100M-$1B companies would be super cheap and those could be profitable wins.
  - RussianCow 7y ago
    Maybe, but I'm skeptical that you could make a significant return on a collection of smaller (let's say $100M) companies. Statistically, most of them are going to fail, so the return on each of the successful ones needs to be pretty high in order to come out on top, but I just don't see how that could be the case unless their starting valuations are incredibly low. I can't see that being nearly as profitable as a single $50B unicorn.
    - kartickv 7y ago
      You'd be right if the valuations of startups were independent of their eventual market size. In that case, it makes no sense to invest in a smaller company. But if you're going after a niche market -- a computer vision-based tennis coaching app, for example -- your valuation will necessarily be lower than a company with broad appeal. So instead of saying, "No, that's a small market" you could invest at a lower valuation and still make the same or higher return as with a unicorn.
86J8oyZv 7y ago
What?! This almost reads like you're saying the market rewards behavior that doesn't really create a variety of competitive and useful products. The thing to keep in mind with investment strategy is that the goal is to make money easily, or find the best way to make money easily. Not to make the best or most interesting products or anything, really. This advice is the best advice when you take that into account.
Traster 7y ago
The purpose of start up investing is to find companies that are going to become more valuable. In order to do that you need to predict what other later stage investors are going to find valuable. You're not there to change the world, you're there to flip a dog-walking service for 10x return. So that dog walking service better be run by a tall white guy who practices yoga and constantly talks about transforming the world.
- sgrove 7y ago
  It seems your analysis isn't very generous. Your example would likely fail the litmus test laid out in the first paragraph on at least these points (at the very least): - a mission that attracts talented people into the startup’s orbit - a product so good that people spontaneously tell their friends about it - a network effect and low marginal costs - and a product that is either fundamentally new or 10x better than existing options.
  - streetcat1 7y ago
    You are missing the main point. - the startups need money, and for some reason, I can provide it before anyone else.
  - Traster 7y ago
    I'm sure the wag founders are talented. I'm sure that some of wag's customers love it. I'm sure that you can argue that it has the same network effect as uber. I'm sure the founders of wag will effuse about a paradigm shift in the canine ambulatory marketplace of ideas.
- tempsy 7y ago
  10x returns are great for VCs will billion+ portfolios. 10x returns on seed investments is arguably too low to justify the risk.
  - caseysoftware 7y ago
    You have that exactly flipped. VCs invest assuming roughly 90% of their deals will be written down to almost nothing. Of the last 10%, some will return some money back but few will break 1-3x. The last few need to be at least 10x to give a useful return to the LPs. Because remember the fund itself took 2% for expenses and has a 20% carry to overcome. On the other hand, angels don't need a massive ROI to be effective. Since this is a small part of their portfolio (vs being their job), if they can write relatively small checks and get 10x back, the numbers work. Remember, they don't have the expenses or the carry to overcome. In addition, odds are angels are involved when it's still a Qualified Small Business so there's (near-)zero taxes on a significant portion.
patothon 7y ago
And it is how you should think when you join a startup, which is an investment by itself.
dannylandau 7y ago
Can you list any of the companies you invested in? I'm very skeptical that start-ups are just sitting around that have this potential would allow any random angel person to invest. Moreover, the probability of find a $10B+ exit happens only about 5 times per decade (10 years), so the chance that you got into one is very unlikely.
freepor 7y ago
Well there are a lot more types of successful company than there are companies that are successful investments from outsiders. A high school friend of mine has a successful house painting business that does millions of dollars per year but he grew it the old fashioned way by bootstrapping and I don’t think it would have ever been a viable investment candidate.
- robocat 7y ago
  The problem with anecdotes about successful friends, is that you don't know how many unsuccessful friends you had (time and money invested for no return), and you don't know the volatility of those investments (extra returns required for extra risk). E.G. VC funds have huge volatility and aim for 20% p.a. return for LP, which implies that individual founders have higher volatility and need higher returns than that to cover opportunity costs. The common rule of thumb is that 90% of small businesses fail within 10 years. I agree that for founders that take VC investment, the expectations of return need to be even higher than VC due to: higher volatility, extreme lack of diversification, and not getting preferential stock (must beat $invested or founders get $0 back).
aaavl2821 7y ago
One example of a type of company where decacorn-or-nothing investing doesn't work is biotech / pharma, which is the second biggest VC sector after pharma Cash on cash returns from seed investing in the biggest biotech companies are an order of magnitude lower than tech. Series a investments in the biggest biotech startups are about half that of tech. This is despite the fact that the companies grow to comparable sizes on comparable amounts of capital [0] Value inflection happens later in biotech than software. Software startups can get product market fit on seed capital, but the biggest value inflection in biotech is human proof of concept, which costs tens or hundreds of millions If you invest in biopharma you should focus on lower loss rates (ie do good technical diligence) and concentrate bets in winning companies [0] https://www.baybridgebio.com/blog/anatomy_of_a_decacorn.html https://www.baybridgebio.com/blog/anatomy_of_a_decacorn.html

awb 7y ago

> This is just one type of company and limiting yourself to just that is limiting and a driver to some of the mind bubble issues in SV. I think the idea is that since such a high percentage of startups fail or provide low returns you need to find these huge wins to make money in the long run. And finding one huge win every ~5 years might be easier than finding a bunch of smaller wins every year.

arcticfox 7y ago
Right, but that is just one way to do it. In the hypothetical scenario that every investor chased only $10B+ potential companies exclusively, $100M-$1B companies would be super cheap and those could be profitable wins.
- RussianCow 7y ago
  Maybe, but I'm skeptical that you could make a significant return on a collection of smaller (let's say $100M) companies. Statistically, most of them are going to fail, so the return on each of the successful ones needs to be pretty high in order to come out on top, but I just don't see how that could be the case unless their starting valuations are incredibly low. I can't see that being nearly as profitable as a single $50B unicorn.
  - kartickv 7y ago
    You'd be right if the valuations of startups were independent of their eventual market size. In that case, it makes no sense to invest in a smaller company. But if you're going after a niche market -- a computer vision-based tennis coaching app, for example -- your valuation will necessarily be lower than a company with broad appeal. So instead of saying, "No, that's a small market" you could invest at a lower valuation and still make the same or higher return as with a unicorn.

86J8oyZv 7y ago

What?! This almost reads like you're saying the market rewards behavior that doesn't really create a variety of competitive and useful products. The thing to keep in mind with investment strategy is that the goal is to make money easily, or find the best way to make money easily. Not to make the best or most interesting products or anything, really. This advice is the best advice when you take that into account.

Traster 7y ago

The purpose of start up investing is to find companies that are going to become more valuable. In order to do that you need to predict what other later stage investors are going to find valuable. You're not there to change the world, you're there to flip a dog-walking service for 10x return. So that dog walking service better be run by a tall white guy who practices yoga and constantly talks about transforming the world.

sgrove 7y ago
It seems your analysis isn't very generous. Your example would likely fail the litmus test laid out in the first paragraph on at least these points (at the very least): - a mission that attracts talented people into the startup’s orbit - a product so good that people spontaneously tell their friends about it - a network effect and low marginal costs - and a product that is either fundamentally new or 10x better than existing options.
- streetcat1 7y ago
  You are missing the main point. - the startups need money, and for some reason, I can provide it before anyone else.
- Traster 7y ago
  I'm sure the wag founders are talented. I'm sure that some of wag's customers love it. I'm sure that you can argue that it has the same network effect as uber. I'm sure the founders of wag will effuse about a paradigm shift in the canine ambulatory marketplace of ideas.
tempsy 7y ago
10x returns are great for VCs will billion+ portfolios. 10x returns on seed investments is arguably too low to justify the risk.
- caseysoftware 7y ago
  You have that exactly flipped. VCs invest assuming roughly 90% of their deals will be written down to almost nothing. Of the last 10%, some will return some money back but few will break 1-3x. The last few need to be at least 10x to give a useful return to the LPs. Because remember the fund itself took 2% for expenses and has a 20% carry to overcome. On the other hand, angels don't need a massive ROI to be effective. Since this is a small part of their portfolio (vs being their job), if they can write relatively small checks and get 10x back, the numbers work. Remember, they don't have the expenses or the carry to overcome. In addition, odds are angels are involved when it's still a Qualified Small Business so there's (near-)zero taxes on a significant portion.

patothon 7y ago

And it is how you should think when you join a startup, which is an investment by itself.

dannylandau 7y ago

Can you list any of the companies you invested in? I'm very skeptical that start-ups are just sitting around that have this potential would allow any random angel person to invest. Moreover, the probability of find a $10B+ exit happens only about 5 times per decade (10 years), so the chance that you got into one is very unlikely.

freepor 7y ago

Well there are a lot more types of successful company than there are companies that are successful investments from outsiders. A high school friend of mine has a successful house painting business that does millions of dollars per year but he grew it the old fashioned way by bootstrapping and I don’t think it would have ever been a viable investment candidate.

robocat 7y ago
The problem with anecdotes about successful friends, is that you don't know how many unsuccessful friends you had (time and money invested for no return), and you don't know the volatility of those investments (extra returns required for extra risk). E.G. VC funds have huge volatility and aim for 20% p.a. return for LP, which implies that individual founders have higher volatility and need higher returns than that to cover opportunity costs. The common rule of thumb is that 90% of small businesses fail within 10 years. I agree that for founders that take VC investment, the expectations of return need to be even higher than VC due to: higher volatility, extreme lack of diversification, and not getting preferential stock (must beat $invested or founders get $0 back).

aaavl2821 7y ago

One example of a type of company where decacorn-or-nothing investing doesn't work is biotech / pharma, which is the second biggest VC sector after pharma Cash on cash returns from seed investing in the biggest biotech companies are an order of magnitude lower than tech. Series a investments in the biggest biotech startups are about half that of tech. This is despite the fact that the companies grow to comparable sizes on comparable amounts of capital [0] Value inflection happens later in biotech than software. Software startups can get product market fit on seed capital, but the biggest value inflection in biotech is human proof of concept, which costs tens or hundreds of millions If you invest in biopharma you should focus on lower loss rates (ie do good technical diligence) and concentrate bets in winning companies [0] https://www.baybridgebio.com/blog/anatomy_of_a_decacorn.html https://www.baybridgebio.com/blog/anatomy_of_a_decacorn.html