6 ms·

Matt Maroon - But Seriously

63 points by joshstaiger 18y ago

timr 18y ago
The second curve is wrong -- because it was stretched graphically, it has more total area beneath the curve. That's important, because if you assume that the mean is the same, but the std. dev. is larger, the probability for the most expected outcomes are actually lower (i.e. the peak of the second bell curve should be below the first one). This is more than just a pedantic observation -- it's an illustration that the VC way leads to a lower probability of success at the most common valuations, but a small chance at a much higher valuation.
- nuclear_eclipse 18y ago
  It was only stretched so that the bottom axis shared the same scale as the first graph. The scales match, so unless I'm missing something, the second curve isn't wrong at all...
  - jedbrown 18y ago
    Then you would have to change the measure to get both curves to integrate to 1. Of course the distribution is nonsense to begin with.
  - DougBTX 18y ago
    The vertical scales don't match, was the thrust of the comment.
run4yourlives 18y ago
Founders, on the other hand, have the competing interest of reducing variation. They’d generally be happy to make a $30m mean return with zero variance. In fact, they’d often be happy with a much lower return and a much lower variance. Ding Ding Ding. Somebody gets it.
- nostrademons 18y ago
  But not too low. The limiting case is an employee, who gets maybe $100k return with close to zero variance. Most of us are entrepreneurs because we wanted to take on more risks than employees in exchange for greater rewards.
  - fallentimes 18y ago
    Exactly, and that's why you need to be very careful with hiring. If you give one of your early employees 1%-5% equity, getting bought for 10-100 MM just doesn't cut it. After taxes, fees & TPS said employee could easily walk away with under $1 million (even if you're bought for over $100 million). This is still obviously awesome, but is probably not the upside that many potential hires are expecting.
    - nostrademons 18y ago
      I always took it as a given that employees will not get rich off an acquisition, unless the company is a Google or Netscape or Stratus (and even then, only if they were management-level and hired fairly early on). I did the math on my last equity offer (as an employee; not counting cofounder offers): I would've ended up with about $5000 worth of stock in a best-case (~50M) acquisition. My former coworker was an early employee of CCBN, purchased for $40M: he ended up with $3000. Both founders and employees need to be very aware of the different risk/reward structures for each. I've heard some founders complain about how hard it is to get decent, hardworking help. Well, of course it is - their upside is 1/10th of yours! And their downside is lower as well, since they usually take a market-rate salary. People are less inclined to put in herculean effort if they have no incentive to do so. For employees, be very cognizant of how much risk the founder has actually eliminated and make sure that fits with the reduced reward. It's really, really hard to build something people want: if they've already done so, they deserve every bit of those outsize founder stakes. But if all they have is an idea and some VC funding, they're asking you to bear many of the same risks, yet leaving you with much less of a reward. The takeaway, IMHO, is don't hire and don't take VC money until you have product/market fit. That gives your employees a risk & upside profile inline with their equity stakes. It also gives your VCs an acceptable return without them forcing you into taking outlandish risks, eg. going after that pie-in-the-sky market opportunity.
axod 18y ago
Just imagine this comment thread for a moment as a series of videos you have to click on and listen to the author slowly waffle. Scary isn't it. Edit: Also, funny comment from their crunchbase profile: "The twitter killer as I have blogged few minutes ago. It has video, video is web2.0, it will kill twitter." (Sorry for being slightly offtopic from the main points of matts post which seem to make a lot of sense)
- tdavis 18y ago
  Quite scary; I'd never get anything done! Not quite as scary as Jesus Camp, but I digress... All the Seesmic comments I have actually bothered to click on have been people reading from scripts or bumbling through a thought that ends with saying nothing. Cut out the middleman and just give me the script in a much more efficient form.
- run4yourlives 18y ago
  I never watch any of these videos, honestly. It's easy to read, understand and rebut text. Video is still very much a one way medium.
- mattmaroon 18y ago
  Yeah, text really is so much better for comments. I don't really care for Seesmic's product, as you probably guessed, for just that reason.
deleted 18y ago
[deleted]
LogicHoleFlaw 18y ago
I swear I have the worst timing ever. I go to college just as the .com bubble crashes, and now that I'm planning my jump into startupdom everything crashes again. Oh well, there's nowhere to go but up, right? Right?
- mtw 18y ago
  not really, flickr, stumbleupon, clubpenguin started when .com bubble crashed. crises do spurr ground-breaking technologies and new ways
  - olefoo 18y ago
    Starvation is a spur to success.
    - LogicHoleFlaw 18y ago
      Well, it certainly won't be an unsurmountable obstacle. Depending on who you ask, I'm either persistent, stubborn, or muley.
    - rw 18y ago
      Starvation eliminates the ability to execute on hard tasks.
      - olefoo 18y ago
        Maybe that should be read as "The PROSPECT of starvation is a a spur to success."
- run4yourlives 18y ago
  Actually, you probably have the best timing ever unless you want your name associated with things that people gnash their teeth at. :-)
- netcan 18y ago
  Right? I wouldn't say that. It might be the best time a company. It's not a good time to sell one.
petergroverman 18y ago
"You've got to pull the weeds if you want a beautiful garden" classic. -P
volida 18y ago
Of course you can build an online business that depends on paying customers and be profitable from day 1 like TicketStumbler, but since when is it any easier?
- fallentimes 18y ago
  Day 75. Revenue since Day 3.
  - webwright 18y ago
    Only if Day 1 was launch day (which it never is). Don't do funny math. :-)
    - fallentimes 18y ago
      Nope. Day 60 was our public launch day. We actually had revenue before we were launched from our blog (no actual site was even up). It was a pile of shit. Two Stone Temple Pilots tickets I believe.
      - run4yourlives 18y ago
        Curious, once you get bigger you're going to butt up against all of the anti-scalping laws that are up there, as well as the ticketmasters of the world that are going to contend that you shouldn't have the right to complete with their monopoly. Have you thought about what strategies you'd use at that time, and if so, would you care to share them with us? This is purely for my own curiosity, I don't have interest in this space or anywhere remotely close to it.
        fallentimes 18y ago
        Short answer: No we won't because it's not our problem. Long answer: We don't carry any inventory or process any transactions - we just show the results of others. Our ticket providers could run in to problems (they have in the past already), but enough deals exist that we'd still have ticket providers. Stubhub, Viagogo, Ticketsnow, Seatexchange, Ticketmaster et al are already working on agreements with the teams/leagues. For example, MLB has already signed a deal with Stubhub. Ticketmaster/Ticketsnow is one of our providers. They are not a direct competitor because they are a primary ticket market - we are a secondary ticket market aggregator. Our main competitors are TickEx, Ticketwood & Fansnap along with some unlaunched ones I'm not supposed to know about it. Most places ignore the anti scalping laws because they're retarded. When demand exceeds supply, prices go up. No one ever complains about all the below face value tickets found at most NBA and MLB games.
briancooley 18y ago
From my limited understanding of how VC works, I would think that both distributions (curves) should be bimodal with one mode at zero rather than being normal distributions. For the higher variance distribution, the mode at zero should have a higher probability than the mode at zero for the lower variance distribution. You might also expect that the second mode would occur at a higher valuation in the high variance distribution.
tdavis 18y ago
Poignant observations as usual, Matt. Thanks for the link as well.
jedbrown 18y ago
A (truncated or folded) normal distribution is completely inappropriate here.
brent 18y ago
All probability density functions must integrate to 1.
- newt0311 18y ago
  Thank you for figuring that out.
- mattmaroon 18y ago
  That's true. I realized the left side of the curve had to look different.
- zhyder 18y ago
  Even if the peak for non-VC was raised, it would still be too simplistic. This is probably more like what the probability distribution looks like: http://www.dabbleboard.com/main/public?created=dummy8&myid=4 http://www.dabbleboard.com/main/public?created=dummy8&my... VC is characterized by large probability spike at $0 and 0 probability at intermediate valuations. Non-VC (i.e. what founders typically want) is closer to a single-mode normal distribution. Though Matt's point (and his graph) about mean and variance are correct: VCs -unlike founders- only care about mean because they can diversify with a large number of startups.
  - mattmaroon 18y ago
    Your graph is probably closer than mine, but the odds of a 1x return aren't 0 at all. I think Fred Wilson said the odds of a mediocre return are like 1/3. VCs abandon ship when it looks to be the correct play just like anyone else.
    - zhyder 18y ago
      IMO abandon ship == near-$0 valuation. Although I didn't know about the 1/3 odds of a mediocre return (defined as 1x?) for VCs. The main point of my (admittedly still simplistic) graph was that the VC probability distribution is bi-modal.
      - 18y ago
rincewind 18y ago
Maybe matt should look at http://en.wikipedia.org/wiki/Maxwell-Boltzmann_distribution http://en.wikipedia.org/wiki/Maxwell-Boltzmann_distribution.
- mattmaroon 18y ago
  That made my brain hurt.
aston 18y ago
Matt's mostly right, but the mathematical conclusions are, depending on how generous you want to be, minorly misleading or flat out wrong. Leaving aside the incorrect graphs and potentially wrongly chosen distributions mentioned elsewhere, Matt missed the real reason VC's and entrepreneurs have different risk profiles. Entrepreneurs have one company they're rooting for--their own. VC firms have tens or, over the course of their lifetime, perhaps hundreds. The law of large numbers says that as you sample more (with more companies), variance around the mean reduces, and you're quite likely to end up with your expected value at the mean. The entrepreneur has no such safety blanket and so would clearly choose to reduce variance.
- mattmaroon 18y ago
  You still wouldn't want more variance even with a larger sample unless with it came higher EV too. I know my graph is wrong (think I mentioned that in the post) since 0 should probably be the likeliest result.
  - aston 18y ago
    Yeah, the reason VC's can stand higher variability is the aggregation, but the reason they want it is approximately your argument, that the distribution makes it so that their worst case is not that bad, but their best case is great (due to the clamp at $0). The wide range of big payoff possibilities must raise the EV, but the individual entrepreneur doesn't care because of the variablity he can't take.
    - mattmaroon 18y ago
      VCs also can stand the variation because they get paid even if they fail. Were VCs paid only a % of the profits, and had to reimburse for failures at the same rate, you'd see their risk tolerance drop greatly.
      - aston 18y ago
        Also true, though their LPs do get paid only on the profits (less the aforementioned management fees). If they weren't comfortable with the risk, they wouldn't invest, right?
akd 18y ago
> when you count the big corporations that aren’t going anywhere (Google, Yahoo, MSN, Myspace, Facebook, YouTube, Amazon, eBay, etc.) and the porn sites (with which you cannot compete) you have a lot of dogs fighting for very few scraps. WTF? Facebook and YouTube didn't even exist 5 years ago. Good to know they weren't thinking the same way.
- mattmaroon 18y ago
  I wasn't suggesting that nobody new will crack it. Just that very few will. 2 qualifies as very few.

63 points by joshstaiger 18y ago

timr 18y ago

The second curve is wrong -- because it was stretched graphically, it has more total area beneath the curve. That's important, because if you assume that the mean is the same, but the std. dev. is larger, the probability for the most expected outcomes are actually lower (i.e. the peak of the second bell curve should be below the first one). This is more than just a pedantic observation -- it's an illustration that the VC way leads to a lower probability of success at the most common valuations, but a small chance at a much higher valuation.

nuclear_eclipse 18y ago
It was only stretched so that the bottom axis shared the same scale as the first graph. The scales match, so unless I'm missing something, the second curve isn't wrong at all...
- jedbrown 18y ago
  Then you would have to change the measure to get both curves to integrate to 1. Of course the distribution is nonsense to begin with.
- DougBTX 18y ago
  The vertical scales don't match, was the thrust of the comment.

run4yourlives 18y ago

Founders, on the other hand, have the competing interest of reducing variation. They’d generally be happy to make a $30m mean return with zero variance. In fact, they’d often be happy with a much lower return and a much lower variance. Ding Ding Ding. Somebody gets it.

nostrademons 18y ago
But not too low. The limiting case is an employee, who gets maybe $100k return with close to zero variance. Most of us are entrepreneurs because we wanted to take on more risks than employees in exchange for greater rewards.
- fallentimes 18y ago
  Exactly, and that's why you need to be very careful with hiring. If you give one of your early employees 1%-5% equity, getting bought for 10-100 MM just doesn't cut it. After taxes, fees & TPS said employee could easily walk away with under $1 million (even if you're bought for over $100 million). This is still obviously awesome, but is probably not the upside that many potential hires are expecting.
  - nostrademons 18y ago
    I always took it as a given that employees will not get rich off an acquisition, unless the company is a Google or Netscape or Stratus (and even then, only if they were management-level and hired fairly early on). I did the math on my last equity offer (as an employee; not counting cofounder offers): I would've ended up with about $5000 worth of stock in a best-case (~50M) acquisition. My former coworker was an early employee of CCBN, purchased for $40M: he ended up with $3000. Both founders and employees need to be very aware of the different risk/reward structures for each. I've heard some founders complain about how hard it is to get decent, hardworking help. Well, of course it is - their upside is 1/10th of yours! And their downside is lower as well, since they usually take a market-rate salary. People are less inclined to put in herculean effort if they have no incentive to do so. For employees, be very cognizant of how much risk the founder has actually eliminated and make sure that fits with the reduced reward. It's really, really hard to build something people want: if they've already done so, they deserve every bit of those outsize founder stakes. But if all they have is an idea and some VC funding, they're asking you to bear many of the same risks, yet leaving you with much less of a reward. The takeaway, IMHO, is don't hire and don't take VC money until you have product/market fit. That gives your employees a risk & upside profile inline with their equity stakes. It also gives your VCs an acceptable return without them forcing you into taking outlandish risks, eg. going after that pie-in-the-sky market opportunity.

axod 18y ago

Just imagine this comment thread for a moment as a series of videos you have to click on and listen to the author slowly waffle. Scary isn't it. Edit: Also, funny comment from their crunchbase profile: "The twitter killer as I have blogged few minutes ago. It has video, video is web2.0, it will kill twitter." (Sorry for being slightly offtopic from the main points of matts post which seem to make a lot of sense)

tdavis 18y ago
Quite scary; I'd never get anything done! Not quite as scary as Jesus Camp, but I digress... All the Seesmic comments I have actually bothered to click on have been people reading from scripts or bumbling through a thought that ends with saying nothing. Cut out the middleman and just give me the script in a much more efficient form.
run4yourlives 18y ago
I never watch any of these videos, honestly. It's easy to read, understand and rebut text. Video is still very much a one way medium.
mattmaroon 18y ago
Yeah, text really is so much better for comments. I don't really care for Seesmic's product, as you probably guessed, for just that reason.

deleted 18y ago

[deleted]

LogicHoleFlaw 18y ago

I swear I have the worst timing ever. I go to college just as the .com bubble crashes, and now that I'm planning my jump into startupdom everything crashes again. Oh well, there's nowhere to go but up, right? Right?

mtw 18y ago
not really, flickr, stumbleupon, clubpenguin started when .com bubble crashed. crises do spurr ground-breaking technologies and new ways
- olefoo 18y ago
  Starvation is a spur to success.
  - LogicHoleFlaw 18y ago
    Well, it certainly won't be an unsurmountable obstacle. Depending on who you ask, I'm either persistent, stubborn, or muley.
  - rw 18y ago
    Starvation eliminates the ability to execute on hard tasks.
    - olefoo 18y ago
      Maybe that should be read as "The PROSPECT of starvation is a a spur to success."
run4yourlives 18y ago
Actually, you probably have the best timing ever unless you want your name associated with things that people gnash their teeth at. :-)
netcan 18y ago
Right? I wouldn't say that. It might be the best time a company. It's not a good time to sell one.

petergroverman 18y ago

"You've got to pull the weeds if you want a beautiful garden" classic. -P

volida 18y ago

Of course you can build an online business that depends on paying customers and be profitable from day 1 like TicketStumbler, but since when is it any easier?

fallentimes 18y ago
Day 75. Revenue since Day 3.
- webwright 18y ago
  Only if Day 1 was launch day (which it never is). Don't do funny math. :-)
  - fallentimes 18y ago
    Nope. Day 60 was our public launch day. We actually had revenue before we were launched from our blog (no actual site was even up). It was a pile of shit. Two Stone Temple Pilots tickets I believe.
    - run4yourlives 18y ago
      Curious, once you get bigger you're going to butt up against all of the anti-scalping laws that are up there, as well as the ticketmasters of the world that are going to contend that you shouldn't have the right to complete with their monopoly. Have you thought about what strategies you'd use at that time, and if so, would you care to share them with us? This is purely for my own curiosity, I don't have interest in this space or anywhere remotely close to it.
      - fallentimes 18y ago
        Short answer: No we won't because it's not our problem. Long answer: We don't carry any inventory or process any transactions - we just show the results of others. Our ticket providers could run in to problems (they have in the past already), but enough deals exist that we'd still have ticket providers. Stubhub, Viagogo, Ticketsnow, Seatexchange, Ticketmaster et al are already working on agreements with the teams/leagues. For example, MLB has already signed a deal with Stubhub. Ticketmaster/Ticketsnow is one of our providers. They are not a direct competitor because they are a primary ticket market - we are a secondary ticket market aggregator. Our main competitors are TickEx, Ticketwood & Fansnap along with some unlaunched ones I'm not supposed to know about it. Most places ignore the anti scalping laws because they're retarded. When demand exceeds supply, prices go up. No one ever complains about all the below face value tickets found at most NBA and MLB games.

briancooley 18y ago

From my limited understanding of how VC works, I would think that both distributions (curves) should be bimodal with one mode at zero rather than being normal distributions. For the higher variance distribution, the mode at zero should have a higher probability than the mode at zero for the lower variance distribution. You might also expect that the second mode would occur at a higher valuation in the high variance distribution.

tdavis 18y ago

Poignant observations as usual, Matt. Thanks for the link as well.

jedbrown 18y ago

A (truncated or folded) normal distribution is completely inappropriate here.

brent 18y ago

All probability density functions must integrate to 1.

newt0311 18y ago
Thank you for figuring that out.
mattmaroon 18y ago
That's true. I realized the left side of the curve had to look different.
zhyder 18y ago
Even if the peak for non-VC was raised, it would still be too simplistic. This is probably more like what the probability distribution looks like: http://www.dabbleboard.com/main/public?created=dummy8&myid=4 http://www.dabbleboard.com/main/public?created=dummy8&my... VC is characterized by large probability spike at $0 and 0 probability at intermediate valuations. Non-VC (i.e. what founders typically want) is closer to a single-mode normal distribution. Though Matt's point (and his graph) about mean and variance are correct: VCs -unlike founders- only care about mean because they can diversify with a large number of startups.
- mattmaroon 18y ago
  Your graph is probably closer than mine, but the odds of a 1x return aren't 0 at all. I think Fred Wilson said the odds of a mediocre return are like 1/3. VCs abandon ship when it looks to be the correct play just like anyone else.
  - zhyder 18y ago
    IMO abandon ship == near-$0 valuation. Although I didn't know about the 1/3 odds of a mediocre return (defined as 1x?) for VCs. The main point of my (admittedly still simplistic) graph was that the VC probability distribution is bi-modal.
    - 18y ago

rincewind 18y ago

Maybe matt should look at http://en.wikipedia.org/wiki/Maxwell-Boltzmann_distribution http://en.wikipedia.org/wiki/Maxwell-Boltzmann_distribution.

mattmaroon 18y ago
That made my brain hurt.

aston 18y ago

Matt's mostly right, but the mathematical conclusions are, depending on how generous you want to be, minorly misleading or flat out wrong. Leaving aside the incorrect graphs and potentially wrongly chosen distributions mentioned elsewhere, Matt missed the real reason VC's and entrepreneurs have different risk profiles. Entrepreneurs have one company they're rooting for--their own. VC firms have tens or, over the course of their lifetime, perhaps hundreds. The law of large numbers says that as you sample more (with more companies), variance around the mean reduces, and you're quite likely to end up with your expected value at the mean. The entrepreneur has no such safety blanket and so would clearly choose to reduce variance.

mattmaroon 18y ago
You still wouldn't want more variance even with a larger sample unless with it came higher EV too. I know my graph is wrong (think I mentioned that in the post) since 0 should probably be the likeliest result.
- aston 18y ago
  Yeah, the reason VC's can stand higher variability is the aggregation, but the reason they want it is approximately your argument, that the distribution makes it so that their worst case is not that bad, but their best case is great (due to the clamp at $0). The wide range of big payoff possibilities must raise the EV, but the individual entrepreneur doesn't care because of the variablity he can't take.
  - mattmaroon 18y ago
    VCs also can stand the variation because they get paid even if they fail. Were VCs paid only a % of the profits, and had to reimburse for failures at the same rate, you'd see their risk tolerance drop greatly.
    - aston 18y ago
      Also true, though their LPs do get paid only on the profits (less the aforementioned management fees). If they weren't comfortable with the risk, they wouldn't invest, right?

akd 18y ago

> when you count the big corporations that aren’t going anywhere (Google, Yahoo, MSN, Myspace, Facebook, YouTube, Amazon, eBay, etc.) and the porn sites (with which you cannot compete) you have a lot of dogs fighting for very few scraps. WTF? Facebook and YouTube didn't even exist 5 years ago. Good to know they weren't thinking the same way.

mattmaroon 18y ago
I wasn't suggesting that nobody new will crack it. Just that very few will. 2 qualifies as very few.