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So, if you randomly decided which startups to invest in, would you be more successful? Can you really predict anything? If you randomly invested in 100 startups

by gersh 14y ago

So, if you randomly decided which startups to invest in, would you be more successful? Can you really predict anything? If you randomly invested in 100 startups, would your returns be better than your screening process? Can you test this?

Gustomaximus 14y ago
They do something similar with equity trades. They get professionals and public entrants to select stocks and include a 'dartboard'. From my limited reading experience the dartboard rarely wins implying people do add value, but it would be interesting if someone could find a history (I didn't with a quick Google). In Australia one news paper includes an Astrologer which I find amusing. With start-ups I think it would be too expensive an experiment to fund.
- diego 14y ago
  "From my limited reading experience the dartboard rarely wins implying people do add value" This is wrong. If the dartboard consistently underperformed most stockpickers (i.e. say it ranked around the 30th percentile year over year) then you could make the case that (some) people add value. If, on the other hand, the dartboard is near the mean of the distribution of outcomes, you could make a case that it's all luck.
  - ghshephard 14y ago
    The fundamental fallacy underlying the "Darts are just as good as people" is that the _entire reason_ the dartboard approach is so successful is because of the massive number of experts who have priced everything close to perfectly. No such market exists for startups - so selection is required.
  - raverbashing 14y ago
    If he had said "all people add value" I would've agreed with you Well, you could try ranking results and calculating a score based on how each person outperformed the dartboard, then calculating a score over time.
  - drblast 14y ago
    You're right. The dartboard experiment would be better (faster) if you had just as many dartboards as investors. Then you could compare the distribution and not just a single result.
- dschobel 14y ago
  Link: http://www.automaticfinances.com/monkey-stock-picking/ http://www.automaticfinances.com/monkey-stock-picking/ On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. That's better than the 50% that would be expected in an efficient market.
pg 14y ago
We have a good deal of evidence that our selection process is better than random. We know it's at least internally consistent, in the sense that startups that are ranked higher in the application phase are more likely to make it past the interview phase. And we also in turn have (a necessarily small amount of) evidence that the startups that turn out to be big winners do the best in the interview phase.
- gersh 14y ago
  Are you willing to share what your evidence is that the big winners do the best during the interview phase? Do you rank all startups that are accepted into YCombinator? Have later YCombinator classes had a larger percentage of homeruns? If you have more applicants and have gotten better at selecting, this should be the case. Is it about selecting winners, or weeding out losers? Are there companies that you know will fail? Who would be least likely to succeed as an entrepreneur?
  - pg 14y ago
    Sure; the evidence is pretty low tech. Between us we can remember the interviews of all the most successful startups, and in no case there was any debate about whether we should fund them. Home runs are so rare that it's not a matter of percentage per batch. A batch will have 1 or 0, and probably 0. It will be a few years before I can tell if the rate is increasing. Selecting winners and weeding out losers seem the same thing to me. There are companies we think will almost certainly fail, but we can never be sure. An ineffectual person would be least likely to succeed as a startup founder.

by gersh 14y ago

Gustomaximus 14y ago

They do something similar with equity trades. They get professionals and public entrants to select stocks and include a 'dartboard'. From my limited reading experience the dartboard rarely wins implying people do add value, but it would be interesting if someone could find a history (I didn't with a quick Google). In Australia one news paper includes an Astrologer which I find amusing. With start-ups I think it would be too expensive an experiment to fund.

diego 14y ago
"From my limited reading experience the dartboard rarely wins implying people do add value" This is wrong. If the dartboard consistently underperformed most stockpickers (i.e. say it ranked around the 30th percentile year over year) then you could make the case that (some) people add value. If, on the other hand, the dartboard is near the mean of the distribution of outcomes, you could make a case that it's all luck.
- ghshephard 14y ago
  The fundamental fallacy underlying the "Darts are just as good as people" is that the _entire reason_ the dartboard approach is so successful is because of the massive number of experts who have priced everything close to perfectly. No such market exists for startups - so selection is required.
- raverbashing 14y ago
  If he had said "all people add value" I would've agreed with you Well, you could try ranking results and calculating a score based on how each person outperformed the dartboard, then calculating a score over time.
- drblast 14y ago
  You're right. The dartboard experiment would be better (faster) if you had just as many dartboards as investors. Then you could compare the distribution and not just a single result.
dschobel 14y ago
Link: http://www.automaticfinances.com/monkey-stock-picking/ http://www.automaticfinances.com/monkey-stock-picking/ On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. That's better than the 50% that would be expected in an efficient market.

pg 14y ago

We have a good deal of evidence that our selection process is better than random. We know it's at least internally consistent, in the sense that startups that are ranked higher in the application phase are more likely to make it past the interview phase. And we also in turn have (a necessarily small amount of) evidence that the startups that turn out to be big winners do the best in the interview phase.

gersh 14y ago
Are you willing to share what your evidence is that the big winners do the best during the interview phase? Do you rank all startups that are accepted into YCombinator? Have later YCombinator classes had a larger percentage of homeruns? If you have more applicants and have gotten better at selecting, this should be the case. Is it about selecting winners, or weeding out losers? Are there companies that you know will fail? Who would be least likely to succeed as an entrepreneur?
- pg 14y ago
  Sure; the evidence is pretty low tech. Between us we can remember the interviews of all the most successful startups, and in no case there was any debate about whether we should fund them. Home runs are so rare that it's not a matter of percentage per batch. A batch will have 1 or 0, and probably 0. It will be a few years before I can tell if the rate is increasing. Selecting winners and weeding out losers seem the same thing to me. There are companies we think will almost certainly fail, but we can never be sure. An ineffectual person would be least likely to succeed as a startup founder.