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My takeaways from the article: (1) VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing; (2) VCs have discovered

by ry454 6y ago

My takeaways from the article: (1) VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing; (2) VCs have discovered that standard deviation shrinks like the square root of the sample size, however their understanding of stats seems to be just enough to run a monte-carlo simulation. Edit: the 3rd takeaway is advice to those who're considering to join a "startup" - if VC needs 500 investments to make a 15% return on average, you need 5000 years to get the sames returns as a line worker.

andreareina 6y ago
> if VC needs 500 investments to make a 15% return on average, you need 5000 years to get the sames returns as a line worker This doesn't necessarily follow. A "line worker"'s downside risk is the opportunity cost they pay for working at a startup, which has a different distribution than the investor's downside risk (the whole investment). At the extreme end I'd argue that e.g. WeWork's investors came out of it worse than the employees.
- vkou 6y ago
  The downside distribution is more punishing on the low end. For people who need to pay rent, buy food, and pay medical bills, a 90% probability of losing half your wages is generally not worth a 10% probability of making 7x your wages. That's because the less money you have, the more valuable a dollar is.
  - chii 6y ago
    > a 90% probability of losing half your wages is generally not worth a 10% probability of making 7x your wages. this is a fairly bad expected value: 10% * 7 * wages - 90% * wages/2 = 25% * wages So you expect to lose 75% of your wages! Nobody is gonna agree to do that! A more realistic scenario is 10% * 100 * wages - 90% * wages/2 = 955% * wages
    - vkou 6y ago
      Your math is wrong. 0.5 * 90% + 7 * 10% = 1.15 average.
      - Tomminn 6y ago
        For the record, the correct way of doing the first math, centered such that 0 represents no change to your wages, is as follows: 0.1 * 6 - 0.5 * 0.9 = 0.15. That is, a 10% chance of a 6 fold gain, and a 90% chance of a 50% loss (-50% gain), gives an expected value of a 15% gain. Your math is correct also, and has 1 represent no change to your wages instead.
        vijayr02 6y ago
        Actually, it's a bit more involved than that... The gain is a one time amount Wages are recurring income. So when wages fall by 50% you need to value an annuity with half the cashflows as before. The PV of your wage income stream over some time horizon can then be compared with the one time gain. Otherwise you are comparing a stock concept (wealth) with a flow concept (income)
- yowlingcat 6y ago
  Correct. Another vehicle to display your point may be to consider the serial startup executive, who leapfrogs from growth stage startup to startup every few years, collecting 0.5%-2% of each in the process. For people who want to make returns from their stakes in startups, that seems like a better idea than going the VC route because it's easier to get better information and better deals as an insider. You can only make so much money from startups by gatekeeping how other people's money is invested. That skill does not an operator make. VCs with operating experience I think operate with a different toolset and underwriting criterion than lifers.
- ry454 6y ago
  Investors lose only a small portion of their assets and most importantly they don't have to lose time. Whether 2% of my liquid assets is more valuable than 4 years of someone's life is debatable, but I can certainly say the loss of those 2% won't make any impact on my life, while that worker won't ever recover his 4 years.
vmception 6y ago
Correct, there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances. There is also the exclusively state-level regulation of negative expected value games versus federal regulation of positive expected value games. There is also the liquidity. But any moral distinctions are arbitrary and unnecessary, based on culture. Today my colleagues on the federal open market committee and I made some important changes to our policy statement (brrr!)
- thomasahle 6y ago
  > there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances Why not? positive expected value games seem like a much better thing to post your money into.
  - vmception 6y ago
    Oh because they are just as much gambles as the other, there are several cultures that require a distinction between gambling and investing, and many cultures that don’t and won’t try to rationalize it just so they can sleep at night. The only reason positive expected value financial games exist is because there exist certain external cases that make them profitable almost all the time, such as inflation. But if your trade isn't sticking around for that, they aren't inherently positive expected value. I have pity for the people that feel they need to split hairs over this.... while paying for insurance.
  - throwaway2245 6y ago
    A national lottery with a positive EV would still make almost all players losers.
    - thomasahle 6y ago
      If you play at enough such lotteries with small enough bets, that sounds great. If the EV had been negative, not so much.
compsciphd 6y ago
one doesn't work at startups to maximize your earnings. you work at a startup because the pay is sufficient for your goals and its work you want to do (ex: because you really believe in the product, you feel you can grow in ways you couldn't in large companies / have impact or control in ways you can't in lage companies or perhaps others). If either of those 2 things aren't true, you probably shouldn't choose to work at a startup over a large established company.
threeseed 6y ago
> just like gamblers in casinos they have no idea what they are doing I follow all of the VCs on Twitter and it's very clear from their many, many tweets that they have a far superior intellect than the rest of us which allows them to divinely predict the future. And between them and their diverse network of other 40 year old, white males they have a rich, deep understand of the customer's wants and needs. And from that they 'select' the startups that best aligns with this understanding. I even believe that one day VCs will realise that they don't need founders and can just invest in each other. Keeping the prosperity moving.
- Toenex 6y ago
  It's a similar phenomenon to media celebrities who clearly have access to special information that makes them a good choice for Tv interviews on just about anything.
- senko 6y ago
  > And between them and their diverse network of other 40 year old, white males they have a rich, deep understand of the customer's wants and needs As a 40yo white male, I resent this generalization. You should have qualified that further with "...living in the Bay Area".
- robert_foss 6y ago
  ಠ_ಠ Not sure if this is sarcasm or not. I'm leaning towards sarcasm, but if there ever was a place where someone would say this with a straight face it would be HN.
  - adwn 6y ago
    > Not sure if this is sarcasm or not. It almost certainly is. > if there ever was a place where someone would say this with a straight face it would be HN. This is not my impression of HN at all. It might have been true, what, a decade ago? but contemporary HN is pretty sceptical of VCs and VC culture.
  - deleted 6y ago
    [deleted]
cryptica 6y ago
I disagree. VCs are great; they are the backbone of our economy and are responsible for creating millions of jobs. A good VC is a huge value-add to any startup and provides valuable advice to aid the value-creation process and streamline the value chain.
- yowlingcat 6y ago
  > A good VC is a huge value-add to any startup What does a good VC add that would be hard to get otherwise? The obvious counterpoint to your argument is that good VCs play primarily passive roles in comparison to the good operators they invest in, by a very wide order of magnitude.
1e-9 6y ago
> VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing Except that the VC expected return is positive. They just need a sufficient number and diversity of bets to lower their variance to a small value relative to their expected return, which most of them don’t do.
silexia 6y ago
VC's are predators. Avoid them like the plague. Get your funds from friends, family, and fools unless you are building a nuclear power plant. Even successful businesses will be destroyed by VC's demanding leverage and higher returns and quick exits.

by ry454 6y ago

andreareina 6y ago

> if VC needs 500 investments to make a 15% return on average, you need 5000 years to get the sames returns as a line worker This doesn't necessarily follow. A "line worker"'s downside risk is the opportunity cost they pay for working at a startup, which has a different distribution than the investor's downside risk (the whole investment). At the extreme end I'd argue that e.g. WeWork's investors came out of it worse than the employees.

vkou 6y ago
The downside distribution is more punishing on the low end. For people who need to pay rent, buy food, and pay medical bills, a 90% probability of losing half your wages is generally not worth a 10% probability of making 7x your wages. That's because the less money you have, the more valuable a dollar is.
- chii 6y ago
  > a 90% probability of losing half your wages is generally not worth a 10% probability of making 7x your wages. this is a fairly bad expected value: 10% * 7 * wages - 90% * wages/2 = 25% * wages So you expect to lose 75% of your wages! Nobody is gonna agree to do that! A more realistic scenario is 10% * 100 * wages - 90% * wages/2 = 955% * wages
  - vkou 6y ago
    Your math is wrong. 0.5 * 90% + 7 * 10% = 1.15 average.
    - Tomminn 6y ago
      For the record, the correct way of doing the first math, centered such that 0 represents no change to your wages, is as follows: 0.1 * 6 - 0.5 * 0.9 = 0.15. That is, a 10% chance of a 6 fold gain, and a 90% chance of a 50% loss (-50% gain), gives an expected value of a 15% gain. Your math is correct also, and has 1 represent no change to your wages instead.
      - vijayr02 6y ago
        Actually, it's a bit more involved than that... The gain is a one time amount Wages are recurring income. So when wages fall by 50% you need to value an annuity with half the cashflows as before. The PV of your wage income stream over some time horizon can then be compared with the one time gain. Otherwise you are comparing a stock concept (wealth) with a flow concept (income)
yowlingcat 6y ago
Correct. Another vehicle to display your point may be to consider the serial startup executive, who leapfrogs from growth stage startup to startup every few years, collecting 0.5%-2% of each in the process. For people who want to make returns from their stakes in startups, that seems like a better idea than going the VC route because it's easier to get better information and better deals as an insider. You can only make so much money from startups by gatekeeping how other people's money is invested. That skill does not an operator make. VCs with operating experience I think operate with a different toolset and underwriting criterion than lifers.
ry454 6y ago
Investors lose only a small portion of their assets and most importantly they don't have to lose time. Whether 2% of my liquid assets is more valuable than 4 years of someone's life is debatable, but I can certainly say the loss of those 2% won't make any impact on my life, while that worker won't ever recover his 4 years.

vmception 6y ago

Correct, there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances. There is also the exclusively state-level regulation of negative expected value games versus federal regulation of positive expected value games. There is also the liquidity. But any moral distinctions are arbitrary and unnecessary, based on culture. Today my colleagues on the federal open market committee and I made some important changes to our policy statement (brrr!)

thomasahle 6y ago
> there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances Why not? positive expected value games seem like a much better thing to post your money into.
- vmception 6y ago
  Oh because they are just as much gambles as the other, there are several cultures that require a distinction between gambling and investing, and many cultures that don’t and won’t try to rationalize it just so they can sleep at night. The only reason positive expected value financial games exist is because there exist certain external cases that make them profitable almost all the time, such as inflation. But if your trade isn't sticking around for that, they aren't inherently positive expected value. I have pity for the people that feel they need to split hairs over this.... while paying for insurance.
- throwaway2245 6y ago
  A national lottery with a positive EV would still make almost all players losers.
  - thomasahle 6y ago
    If you play at enough such lotteries with small enough bets, that sounds great. If the EV had been negative, not so much.

compsciphd 6y ago

one doesn't work at startups to maximize your earnings. you work at a startup because the pay is sufficient for your goals and its work you want to do (ex: because you really believe in the product, you feel you can grow in ways you couldn't in large companies / have impact or control in ways you can't in lage companies or perhaps others). If either of those 2 things aren't true, you probably shouldn't choose to work at a startup over a large established company.

threeseed 6y ago

> just like gamblers in casinos they have no idea what they are doing I follow all of the VCs on Twitter and it's very clear from their many, many tweets that they have a far superior intellect than the rest of us which allows them to divinely predict the future. And between them and their diverse network of other 40 year old, white males they have a rich, deep understand of the customer's wants and needs. And from that they 'select' the startups that best aligns with this understanding. I even believe that one day VCs will realise that they don't need founders and can just invest in each other. Keeping the prosperity moving.

Toenex 6y ago
It's a similar phenomenon to media celebrities who clearly have access to special information that makes them a good choice for Tv interviews on just about anything.
senko 6y ago
> And between them and their diverse network of other 40 year old, white males they have a rich, deep understand of the customer's wants and needs As a 40yo white male, I resent this generalization. You should have qualified that further with "...living in the Bay Area".
robert_foss 6y ago
ಠ_ಠ Not sure if this is sarcasm or not. I'm leaning towards sarcasm, but if there ever was a place where someone would say this with a straight face it would be HN.
- adwn 6y ago
  > Not sure if this is sarcasm or not. It almost certainly is. > if there ever was a place where someone would say this with a straight face it would be HN. This is not my impression of HN at all. It might have been true, what, a decade ago? but contemporary HN is pretty sceptical of VCs and VC culture.
- deleted 6y ago
  [deleted]

cryptica 6y ago

I disagree. VCs are great; they are the backbone of our economy and are responsible for creating millions of jobs. A good VC is a huge value-add to any startup and provides valuable advice to aid the value-creation process and streamline the value chain.

yowlingcat 6y ago
> A good VC is a huge value-add to any startup What does a good VC add that would be hard to get otherwise? The obvious counterpoint to your argument is that good VCs play primarily passive roles in comparison to the good operators they invest in, by a very wide order of magnitude.

1e-9 6y ago

> VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing Except that the VC expected return is positive. They just need a sufficient number and diversity of bets to lower their variance to a small value relative to their expected return, which most of them don’t do.

silexia 6y ago

VC's are predators. Avoid them like the plague. Get your funds from friends, family, and fools unless you are building a nuclear power plant. Even successful businesses will be destroyed by VC's demanding leverage and higher returns and quick exits.