3 ms·

> Therefore, if you believe the company to be of the A type ... That's the problem I have with this line of thinking. An investor doesn't "believe" it to be t

by nimble 13y ago

> Therefore, if you believe the company to be of the A type ... That's the problem I have with this line of thinking. An investor doesn't "believe" it to be type A. An investor gambles that it's going to be type A. Reasoning after the fact that you should have been willing to spend more on the winner, without accounting for probabilities, is flawed reasoning. If anyone could see five years ago that the company was certainly going to be worth $10b today, then it would have been worth $10b five years ago (after adjusting for inflation). If no one else could see it but you, and yet you were somehow certain, then sure, but that's not typically the situation. [Before continuing, let me point out that you flubbed the math: 20% of $10b is $2b, not $200m. The difference between A and B equity is $1.98b, not $180m. This wasn't particularly important to your point, but since I am continuing this example I thought it might avoid confusion to note the error.] Since most people generally prefer frequentist reasoning, here's another try. Suppose you invested in 100 companies, one of which was company A and the other 99 of which failed. If you invested at 20% in all 100 companies valued at $40m each, then you've spent $800m and have $2b in equity. If you invested in those same companies at $400m valuation each, then you spent $8b for that same equity of $2b.

chacham15 13y ago
Haha, good catch on the math goof. > without accounting for probabilities, is flawed reasoning. This is the problem. It is rather illogical to believe that one can come up with an accurate probability of success for a given company given the multitude of variables both known and unknown. For example, AirBnB was thought to be not only bad, but a terrible idea initially yet it is one of the biggest winners in all of the YC batches. What probability of success did investors give it? Think of it from the point of view of an investor who passed up on AirBnB. How much do you think that these probabilities that you come up with mean when you know how bad you are at deciding whether to invest at all.
- nimble 13y ago
  Who says the probabilities are going to be accurate? The point is that it's better to guess at probabilities for outcomes and then calculate than it is to blind guess at valuations. Presumably, YC will be in a better position than most to estimate the probabilities.

by nimble 13y ago

chacham15 13y ago

Haha, good catch on the math goof. > without accounting for probabilities, is flawed reasoning. This is the problem. It is rather illogical to believe that one can come up with an accurate probability of success for a given company given the multitude of variables both known and unknown. For example, AirBnB was thought to be not only bad, but a terrible idea initially yet it is one of the biggest winners in all of the YC batches. What probability of success did investors give it? Think of it from the point of view of an investor who passed up on AirBnB. How much do you think that these probabilities that you come up with mean when you know how bad you are at deciding whether to invest at all.

nimble 13y ago
Who says the probabilities are going to be accurate? The point is that it's better to guess at probabilities for outcomes and then calculate than it is to blind guess at valuations. Presumably, YC will be in a better position than most to estimate the probabilities.