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There's a .00006% Chance of Building a Billion Dollar Company

132 points by ca98am79 13y ago

deleted 13y ago
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DennisP 13y ago
So you're saying there's a chance...
- toblender 13y ago
  The entrepreneurs I know all do multiple startups, so any chance is better then no chance :D
  - BrainInAJar 13y ago
    Not if you factor in opportunity cost, really. They could've spent that time making 6 figures at an already established company, instead they wasted their time on some bullshit for a tiny fractional chance of making any money
    - mindcrime 13y ago
      What you're neglecting is the psychology involved... for many of us, a combination of a simple desire to build something or even attempt to build something, is its own intrinsic award... and many of us simply cannot stand to have a "boss" in the traditional sense, and will take running a startup where we get to "call our own shots" to a greater degree, over working for $BIGCORP, even if the financial gains are smaller. Personally, I can say that I am absolutely miserable working as just another cog in the machine, as part of the typical big, bland, bureaucratic $BIGCORP. In fact, "miserable" doesn't even begin to go far enough. So if we can get this startup even to the point of being nothing more than a "lifestyle business" it's still a net win.
      - BrainInAJar 13y ago
        But really, you still do have a "boss" in the traditional sense, and don't get to "call your own shots" because you have investors and creditors. The whole startup scene is predicated on a narrative that is quite frankly bullshit
        mindcrime 13y ago
        No, having "a boss" and having investors and creditors isn't the same thing. That's exactly my point. You can draw an analogy between the two, but that's all it is, an analogy. A "boss" is one discrete individual who can show up, and say "do this" or "do that" and you have, effectively, no choice in the matter at all. You're under that person's thumb and if they micromanage you, you're fucked unless you quit. With investors, there is less likely to be one person who has that kind of power, and depending on how much equity you've maintained, or how you've structured your board, there might not be anybody with that power. Having to be accountable to a group, in aggregate, is a different beast... and the point is, you're accountable for the outcome but you have a lot more say-so in the "how" and "what".
  - w1ntermute 13y ago
    So if you found 10 companies, then you've got a ~0.0006% chance of one of them becoming a billion dollar company. Not exactly a quantum leap.
    - andylei 13y ago
      only if success (here defined as creating what becomes a billion dollar company) is iid. its probably not. if you've failed at starting 5 companies, the probability of succeeding at the next one is probably less than 0.00006%
      - deleted 13y ago
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      - socillion 13y ago
        Your conclusion does not follow from the premise. Couldn't the experience gained from starting the first 5 result in a greater chance of "success"? If failure is defined as anything less than 1 billion, it is particularly meaningless as an indicator of future success.
    - sigkill 13y ago
      My probability theory is a bit weak so correct me if I'm wrong. Since each company you start is an "independent event" doesn't your probability still stay at 6e-5?
      - w1ntermute 13y ago
        No, the probability I calculated is the probability that at least one of the companies will succeed if you start N of them, or 1-(1-0.00006)^N
    - marcosdumay 13y ago
      Unless your definition of sucess is a bit more flexible than the one of the article... If that happens there are small improvements to your chances. But then, it's a dificult calculation. The more capital you apply at the company, the more money you must take out of it.
pouzy 13y ago
I'm not sure that we can compare that to having a chance to win the lottery or get struck by lightening. There's a bit more than just luck in the whole equation, but luck is definitely a factor
besquared 13y ago
A ratio without a denominator is useless.
- besquared 13y ago
  That reply might be off topic for the article. I just think the headline isn't topical in any way. It saddens me.
periferral 13y ago
Any idea how he comes up with $73k/yr? He says 3 members, 49 months and I'm assuming he means $1b. By my calc that is still $8m/y.
- lionheart 13y ago
  Well, probably the 3 split a small percent of the final equity because of dilution from investors.
  - jeremyt 13y ago
    If you are a founder in a company that sells for a billion dollars, and you only come out of it with 300,000, that's an almost criminal level of incompetence. That's .03%. Assuming you start from some whole number of percentage ownership, it's almost impossible to get diluted that low. You would need something like 10 rounds of 50% dilution.
    - periferral 13y ago
      i agree. sounds like something emp #300 should walk away with.
darkchasma 13y ago
That doesn't seem right, that's a better chance that dying in a fire.
saosebastiao 13y ago
It is an interesting article and I agree with the subject matter (just wanting to do a startup is not reason enough), but I wanted to comment on the title: 0.00006% is a prior distribution. I wouldn't be surprised if the success rate posterior goes up an order of magnitude with something as minimal as a 4 year degree. Which is still a really small number...but it drastically changes your expected value.
- MJR 13y ago
  Or something like the type of business. A local service-based business like a hair salon, diner or hot dog cart shouldn't even be considered as a business that has the possibility of being worth a billion dollars. If this is based on total number of registered businesses, removing the large number of established small businesses that have been in business for X years would help arrive at a better number.
- arbuge 13y ago
  There is a good analysis of this in Felix Dennis' book (How to Grow Rich). I don't remember what number he came up with, but after narrowing things down he clearly showed that the chances of success are actually far higher than the prior distribution.
  - a8da6b0c91d 13y ago
    Felix Dennis is such a refreshing and honest break from all the ditzy California "change the world" and "passion" fluff. If I recall correctly he opened up with the following quotation: "Get place and wealth, if possible with grace; If not, by any means get wealth and place." --Alexander Pope
  - maerF0x0 13y ago
    nb: the book is "How to get rich" www.amazon.com/How-Get-Rich-Greatest-Entrepreneurs/dp/1591842719
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tanglesome 13y ago
That's still a lot better shot than you can get from most lotteries.
- huherto 13y ago
  Is it more effort than buying a lottery ticket ? ;)
- Retric 13y ago
  Not really, assuming your opertunity cost runs around 40k then spending 40k on MegaMillions gives you about 0.02% chance of hitting the jackpot.
linux_devil 13y ago
.00006% chance but 100% experience worth having .
- mikeg8 13y ago
  Great mentality.
Terretta 13y ago
I would assume this headline is "of all companies for which founding papers are filed in America". That seems a poor statistic to use when 65% of Americans try to start a business at some point. A more meaningful number might be % chance among companies who received venture funding. A funding event represents a concrete shift in probability of success. Does anyone commenting here know the probability of, say, a $10M, $100M, and $1B exit after a Silicon Valley funding event (funding from recognized VC)?
- jsonne 13y ago
  Also notable that 57% of US businesses are freelance/consulting. (Aka one owner and no employees)
- mikeg8 13y ago
  Couldn't agree more. Another factor that popped into my head: how many people start businesses with billion dollar aspirations? If you open a bike store, restaurant or mom-and0pop shop, chances are you aren't even trying to turn them into billion dollar companies.
- ccarpenterg 13y ago
  I think a bayesian approach is more suitable: P($1B company | you're in SV, $100MM in funding, etc) Think about a bayesian network and its joint probability.
- drusenko 13y ago
  13% of VC-backed startups exit for over $10M, 5% exit for over $50M, and 2% exit for over $100M, although there are many different studies with slightly different numbers: http://www.quora.com/What-is-the-truth-behind-9-out-of-10-startups-fail http://www.quora.com/What-is-the-truth-behind-9-out-of-10-st...
  - mason55 13y ago
    Those numbers are all surprisingly high
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ck2 13y ago
You could just bottle water and add some government subsidized corn syrup to it. Buy a billion bottles of water for a penny a bottle and sell it for $1. Then instead of paying taxes, get checks from the government for pretending to hire people for decent jobs while keeping their wages so low that they have to use taxpayer funded food and medical assistance. Tada. The "American Way" to become a billionaire.
- JamesArgo 13y ago
  Competing with Coke and Pepsi, the surest way to make a billion...
  - mercurialshark 13y ago
    Ha!
  - fizx 13y ago
    Vitamin water's 4+B acquisition was about 5 years ago. http://www.nytimes.com/2007/05/26/business/26drink-web.html?_r=0 http://www.nytimes.com/2007/05/26/business/26drink-web.html?...
yesplorer 13y ago
In other news, meaningless statistics are up 17% in the past 24 hours... A completely irrelevant headlines for such a nice article. Sad. You lumped all start-ups together and struck a percentage. Did you consider that there are 1000s of people who are doing what they do not because they want a chance to build a billion-dollar company but rather a chance to providing real solutions to real problems? People do what they do because they love what they do and as long as it is sustainable they want to be working on it without thinking about some mythical billion-dollar mark.
luketych 13y ago
Most of your chance at success was already determined by your genes and the way you've lived your childhood. Ideas aren't successful, people are.
- gohrt 13y ago
  And the wealth and power of the people your parents are friendly with.
misiti3780 13y ago
Elon Musk must be super lucky --> .00006^3 = 2.16e-13 (although this calculation assumes the chances are completely independent, which studies have show, they are not)
- izendejas 13y ago
  Right, that's just a prior. His probability is much higher given that he had two prior exits, is incredibly intelligent, his network is vast and resourceful, etc. Very much off-topic, but he's an anomaly in many ways...eg, I was incredibly amazed to learn that he and his former wife had twins and triplets. Wonder what the chances of that are. :)
  - misiti3780 13y ago
    given who their dad is - i wonder what the chances of them being successful entrepreneurs are :)
001sky 13y ago
This headline is just self-serving. The article is about a $1B company, and this headline is simply a strawman to tear down. The rhetorical "synopsis" here is that (1) sucess is impossible; but (2) oh wait, i just did that without breaking a sweat. Here is my 3 step solution to success {...}
JumpCrisscross 13y ago
Gompers et al published a paper in 2006 [1] which studied a database of "firms that have obtained venture capital financing" between 1976 and 2000. Defining "'success' as going public or filing to go public by December 9 2003, "they find the overall success rate on first time ventures is 25.3%. Not surprisingly, serial entrepreneurs have an above-average success rate of 36.9% on their first ventures: venture capitalists are more likely to be more enthusiastic about financing a successful entrepreneur than one who has previously failed. It is more interesting that in their subsequent ventures they have a significantly higher success rate (29.0%) than do first time entrepreneurs (25.3%)." Note that the 99th percentile of valuations in this data set was $131.5 million. Additionally, the data comes from a period of lower competition for "doing a startup". Finally, one must account for survivorship bias that would be present in a 1976-2000 data set of venture capital financing. [1] http://businessinnovation.berkeley.edu/WilliamsonSeminar/scharfstein041207.pdf http://businessinnovation.berkeley.edu/WilliamsonSeminar/sch...
mercurialshark 13y ago
Good thing we are only going for a hundred million at the moment.
pg 13y ago
It's a fallacy (though a very commonly held one) that if x% of people succeed at some task, the chances you will succeed are x%. That's only true for tasks where aptitude is not a factor.
- wslh 13y ago
  The competition factor is also very important: if the world population (and entrepreneurs) growth by 400% it is possible that the "same" few companies will reach the billion (adjusted by inflation)
- ScotterC 13y ago
  However, it's quite easy for us to believe our aptitude will make us the exception. Adding a numerical grain of salt is helpful for the evaluation.
- jpwagner 13y ago
  sort of. if i have 10 coins, 9 of which have 44.4% chance of heads and 1 has 100% chance, choosing a coin at random and flipping it has 50% chance of heads overall. sure, there is one outstanding coin. the "fallacy" is true when you look at the whole rather than the individual factors, which include aptitude in some cases so i guess you're correct on the last point.
- TheBiv 13y ago
  Color me dense, but I don't understand this point. The author clearly had aptitude to be successful, but if we were to randomly put a percentage on his aptitude that weighted him above the average, it would still probably be less than 0.00%
  - gdubs 13y ago
    It means that statistics are useful until you try to apply them to an individual. While a statistic may hold true for an entire population, the converse does not logically follow for an individual. I think the fallacy may be "over generalization".
thors_hammer 13y ago
It seems to me that the claim he makes re $73k per year is misinterpreting the study he is basing it on. His claim: "Even if you do raise money and sell a company or take it public, your median time to doing that is probably 49 months. Assuming there are three founders, your median expected payoff would be $300,000 each — that’s the equivalent of $73,000 a year." Based upon his Stanford talk (http://www.youtube.com/watch?v=m2sj-U2QSHs http://www.youtube.com/watch?v=m2sj-U2QSHs at approx. 27:15), these calculations are based upon the paper "The Incentives To Start New Companies: Evidence From Venture Capital" by Robert E. Hall and Susan E. Woodward (http://www.nber.org/papers/w13056 http://www.nber.org/papers/w13056). From Pg. 2 of the Hall/Woodward paper: "Our most important ﬁnding is that the reward to the entrepreneurs who provide the ideas and long hours of hard work in these startups is remarkably small, once risk is taken into consideration. The contract between venture investors and entrepreneurs imposes the burden of the idiosyncratic risk of a startup on its entrepreneurs. Far from shifting the risk toward the diversiﬁed investors, the contract exacerbates the risk the entrepreneurs face. Although the average ultimate cash reward to the entrepreneurs of a company that succeeds in landing venture capital is $9 million for the group, most of this expected value comes from the small probability of a great success. With a coeﬃcient of relative risk aversion of 2, the entrepreneurs would sell their holding as of the time they receive venture funding for about $900,000 to avoid the undiversiﬁed risk of their claim on the company. It seems to me that this $900k figure (which is the basis for the $73k per year figure) is based upon a scenario where the entrepreneurs sell "as of the time they receive venture funding" and not a scenario where "you do raise money and sell a company or take it public." Isn't the $900k figure referring to a risk-adjusted founder sale a much earlier stage in the process? Also, from page Pg. 20 of the Hall/Woodward paper: "The median time from ﬁrst venture funding to exit in our data is 49 months. We do not have data on the typical number of entrepreneur-founding shareholders, but we believe that three is probably representative. The return based on the $900,000 ﬁgure is a little over $6,000 per entrepreneur-month. The extreme idiosyncratic risk of venture-backed entrepreneurship and the inability of the venture contract to insure entrepreneurs against the risk result in a tiny incentive facing a prospective entrepreneur."
maerF0x0 13y ago
It seems silly to me that people spend money on spurious insurance. You're effectively betting in a Casino (you're not the house). Unless you think you have some sort of edge on their team of actuarials, or you think you're an outlier (w/ exceptionally bad circumstances), you're better off keeping the premium (along with its expected profit). I suppose if you want to be super technical, you should weigh the risk/reward factor of the profit margin in the costs and the value that would be paid out. I'd argue few of us are capable of doing that math well, nor would it be profitable to spend our time doing it (because we have a business to run/build) In my case, the only insurance I carry is that which is required by law, or offered for "free" (eg, employer paid insurances). I'd still prefer to have my money. I'm betting that Im quite normal.
- a8da6b0c91d 13y ago
  You would go uninsured rather than get catastrophe health insurance? You do realize that in America an uninsured trip to the emergency room with trauma means bankruptcy. Farmers hedge risk for the same reason. A cash crunch could put them out of business. But now that I think about it I can't guess what this weather insurance offers farmers that the commodity futures markets don't.
  - maerF0x0 13y ago
    I think you hit on the breaking point for me. The point is even if I went bankrupt I could come back. But if I cant afford the surgery that saves my life, there's no coming back (that I'm aware of). So yes, when I travel abroad I do buy health insurance. But I dont carry tenants insurance (for my possessions) or buy other insurances... I guess if I were so leveraged like a farmer I'd have more fear. But i have almost exactly $0 debt at any given time meaning even if I were to lose my job, I'd be fine. If I had 4 kids and a mortgage and a tractor payment and... and.. debt and leverage, I guess I'd be a lot more worried.
- notahacker 13y ago
  The insurance isn't necessarily "spurious" if the adverse weather is an existential risk to the business, which it might be for farmers in particular. Sure, you might be better off saving to cover predictable small losses to one crop from a bad winter every few years, but it's probably practical to cover the one in 30 year drought that kills everything. You'll regret bankruptcy if the drought dries up your bank balance before you've saved enough to cover the risk so much more than the opportunity cost of paying out premiums for a drought free half-century. Similarly, paying hefty premiums to insure cheap consumer goods like mobile phones that you could replace for the cost of 12 months premium plus excess isn't a smart move unless you're especially clumsy, forgetful or liable to be mugged. But a non-wealthy person not getting affordable insurance for lifesaving treatments[1] is crazy (even after factoring in the insurer's margin, and interest on savings you're still gambling on your lifetime treatment costs being not much above the average for a person like you and the bills not coming before you've saved enough - two things which your insurer doesn't care about at all if he's pooled risk well enough.) Not playing Russian Roulette also has a negative ROI... [1]or living in a country with decent public healthcare
betadreamer 13y ago
Good point in the article about how people should not start a startup by saying they are going into startups. Many of my friends (including myself) made this mistake :P Problem, Solution, and then the rest ...
sirkneeland 13y ago
Well I suppose that still makes it .00006% likelier than my becoming a billionaire by being an employee at a Fortune 500 company.
- blibble 13y ago
  just don't look at the expectation
Synroc 13y ago
I urge everyone to ignore the title for what is actually a well-written interesting (at least to me) article.
OldSchool 13y ago
I imagine that many people on HN would wither in a six-figure corporate job, and virtually all are aware of the rarity of the $1B exit. I'd take a self-sustaining entrepreneurial situation over the day-to-day corporate grind any time. You're still a rare hero if your exit is $100M or "only" $10M. Even a $1M payout would put you ahead about twenty years compared to that corporate job, provided you don't live like it's your new salary.
morewillie 13y ago
So you're telling me there's a chance! -Lloyd Christmas
- tpowell 13y ago
  I came here to write this.
- raverbashing 13y ago
  It's even bigger than most lotteries.
larrys 13y ago
"Just look at the numbers, he says: “There’s a 0.00006% chance of building a company that will grow to be worth more than a billion dollars. Even if you do raise money and sell a company or take it public, your median time to doing that is probably 49 months. Assuming there are three founders, your median expected payoff would be $300,000 each — that’s the equivalent of $73,000 a year. And the probability of making nothing is 67%. So if your motivation for doing a startup is financial reward, you’re better off going to Google, a hedge fund, choosing a career with stable income potential.” I guess I'm curious how such an obvious typo could appear here. They mean 300m not 300k. But the rest of the paragraph is written in a "so what" way which seems to backup the "small" number.
- cmurphycode 13y ago
  "expected" payoff is the key, here. He's not just dividing a billion by 3.
  - nostrademons 13y ago
    That's what I figured when I read the article, but his math is still off. If there's a 0.00006% chance of success, that's roughly 1 in 2 million. So your average expected payoff would be $1B/2M = $500. Divide by 3, and it's $166/founder, or $40/year. His math is very suspect in the first place, because 1 in 2 million is roughly what you'd get if you divide the number of billion-dollar exits by the population of the U.S. That's an odd way to slice it; if you want something more representative of an individual person's odds, you're better off dividing the number of billion dollar exits by the number of companies started that believe they have a shot at a billion dollars (which might be in the tens to hundreds of thousands, but certainly not 2 million), and then you end up with figures roughly equivalent to his AEPs, but that ignores that many of those founders are college or grad students and the outcome is getting that job at Google after all.
    - cmurphycode 13y ago
      Yep, the math makes no sense if you assume the two options are 0 or 1B. I guessed that he was using the actual outcomes of the entire spread- considering that he references the 67% chance of $0 shortly thereafter, it is clear he doesn't think the other 99.999.... percent result in $0. Even if my excuses for him are correct, I think you all have made a valid point that this is not a really productive way to measure :) Nonetheless, the lesson "don't start a company to get rich" is, I think, a good thing to say.
eloff 13y ago
Never tell me the odds - Han Solo
peterjancelis 13y ago
Terrible title, but one of the best articles I've read in a long time. There are some pretty profound quotes in there.
ffrryuu 13y ago
Might as well play the lottery!
ph0rque 13y ago
Great article, although it probably should be titled something like, "How to build a company solving hard problems". Very inspirational for my side project, AutoMicroFarm (http://automicrofarm.com http://automicrofarm.com). One thing my co-founder and I will do this week is break down the problem we're solving into known unknowns, and figure out a way to get them into the "known" category quickly and efficiently, so we can "grind and innovate" faster/cheaper.
j45 13y ago
One interesting thing in this article is the statement that a billion dollar company leaves the founders with $300,000 each. Am I the only one surprised by this?
mindcrime 13y ago
This article turned out to be a lot more than I expected. From the headline, I was expecting more of a "buzzkill" article, full of negativity and basically saying "don't bother trying". But it is actually more of "Yeah, the odds are very against you, but, nonetheless, here are some ways you can optimize things to favour you as much as possible". The part about "The Grind" reminds me a bit of the classic pg essay: "How Not To Die".[1] (My personal favourite, out of all the pg essays I've read). I love this pg quote, as it's full of inspiration and is about as motivating a quote as I know: "If you can just avoid dying, you get rich. That sounds like a joke, but it's actually a pretty good description of what happens in a typical startup. It certainly describes what happened in Viaweb. We avoided dying till we got rich." [1]: http://www.paulgraham.com/die.html http://www.paulgraham.com/die.html
dynofuz 13y ago
im gonna do it!
drakaal 13y ago
I disagree with the "Know what you don't know". Building a billion dollar company is about knowing what others don't know. If it were simply a matter of knowing what others don't someone would have already beat you to it.
mesozoic 13y ago
So you're telling me there's a chance?
Siecje 13y ago
Why wouldn't you just save money when you are making it instead of paying for insurance and having to go through the hassle of filing claims?
AJ007 13y ago
Almost all of these comments are about the headline, but the actual article is really good: -Get rid of luck “When you say you got lucky, you got lucky because you didn’t know what was going to happen. The corollary is, if you know what’s going to happen, then there is no luck. There’s also no uncertainty and no risk,” Friedberg says. “In this context, shouldn’t your objective be to always know what’s going to happen? To always remove the unknowns?” You can see the world as one of superstition, luck, and magic, or you can see the world as one of logic and explainable order. Nassim Taleb had a few things to say about people using logic to explain random past events, and there is some truth to this as well (which incidentally is probably somewhat relevant to predicting nearly chaotic weather problems.) But, you can make manageable, hedged bets and discover truth to the reality today. The output will be a solved problem that makes customers happy. There are more opportunities today than I have ever seen before. There are more tools for people to solve these problems than ever before. Look at waste, look for inefficiencies, and remove them even just a little bit at a time. You don't need to build a billion dollar company. But, if you do an excellent job at fixing that small problem, you might end up with a billion dollar company. A lot of companies make money through introduction of waste, inefficiency, and confusion. They fatten their short term margins while erasing their companies long term viability.
- avalaunch 13y ago
  Get rid of luck was one good point the article made. The other was to do something meaningful. This is one time I wish someone changed the title of the article. It's just silly link bait that hides a really good article.
clienthunter 13y ago
More accurately, if you randomly select a company ex post from the sample used to make that headline, the probability of said company having been sold for 1B USD is 0.0000006. With the same conditions, the probability of the sperm that made you getting to the egg, however, was in the interval [0.000000001, 0.00000002]. This, by the way, means the probability of this particular combination of unique human beings alive today is somewhere around 1e^(-1.28e^11) - that is a "0." followed by approximately 128 billion zeros before you hit another number. The probability is so small that writing it out at one digit per second, without sleeping, would take approximately 4000 years. And yet here we all are. Don't make the mistake of thinking that any of that actually means anything beyond what it literally says.
ozi 13y ago
So you're twice as likely to get struck by lightening in a given year. http://www.wolframalpha.com/input/?i=.00006%25+probability http://www.wolframalpha.com/input/?i=.00006%25+probability
moodal1111 13y ago
The chances of winning in power ball with 10,000 tickets is around 0.000057 , (10000/175,223,510) . Who wants to pull in for that :)
cantankerous 13y ago
"Saying you’re going to do a startup or you want to be a ‘serial entrepreneur’ has about as much meaning as saying ‘I’m going to jump off a plane.'" I'd actually posit that saying you're going to jump off a plane has a lot more meaning than saying you're a serial entrepreneur. At least most folks have a grasp of what it means to literally jump off of an airplane.
officialjunk 13y ago
That's better odds than winning most CA lotto jackpots...
X4 13y ago
Challenge accepted.

132 points by ca98am79 13y ago

deleted 13y ago

[deleted]

DennisP 13y ago

So you're saying there's a chance...

toblender 13y ago
The entrepreneurs I know all do multiple startups, so any chance is better then no chance :D
- BrainInAJar 13y ago
  Not if you factor in opportunity cost, really. They could've spent that time making 6 figures at an already established company, instead they wasted their time on some bullshit for a tiny fractional chance of making any money
  - mindcrime 13y ago
    What you're neglecting is the psychology involved... for many of us, a combination of a simple desire to build something or even attempt to build something, is its own intrinsic award... and many of us simply cannot stand to have a "boss" in the traditional sense, and will take running a startup where we get to "call our own shots" to a greater degree, over working for $BIGCORP, even if the financial gains are smaller. Personally, I can say that I am absolutely miserable working as just another cog in the machine, as part of the typical big, bland, bureaucratic $BIGCORP. In fact, "miserable" doesn't even begin to go far enough. So if we can get this startup even to the point of being nothing more than a "lifestyle business" it's still a net win.
    - BrainInAJar 13y ago
      But really, you still do have a "boss" in the traditional sense, and don't get to "call your own shots" because you have investors and creditors. The whole startup scene is predicated on a narrative that is quite frankly bullshit
      - mindcrime 13y ago
        No, having "a boss" and having investors and creditors isn't the same thing. That's exactly my point. You can draw an analogy between the two, but that's all it is, an analogy. A "boss" is one discrete individual who can show up, and say "do this" or "do that" and you have, effectively, no choice in the matter at all. You're under that person's thumb and if they micromanage you, you're fucked unless you quit. With investors, there is less likely to be one person who has that kind of power, and depending on how much equity you've maintained, or how you've structured your board, there might not be anybody with that power. Having to be accountable to a group, in aggregate, is a different beast... and the point is, you're accountable for the outcome but you have a lot more say-so in the "how" and "what".
- w1ntermute 13y ago
  So if you found 10 companies, then you've got a ~0.0006% chance of one of them becoming a billion dollar company. Not exactly a quantum leap.
  - andylei 13y ago
    only if success (here defined as creating what becomes a billion dollar company) is iid. its probably not. if you've failed at starting 5 companies, the probability of succeeding at the next one is probably less than 0.00006%
    - deleted 13y ago
      [deleted]
    - socillion 13y ago
      Your conclusion does not follow from the premise. Couldn't the experience gained from starting the first 5 result in a greater chance of "success"? If failure is defined as anything less than 1 billion, it is particularly meaningless as an indicator of future success.
  - sigkill 13y ago
    My probability theory is a bit weak so correct me if I'm wrong. Since each company you start is an "independent event" doesn't your probability still stay at 6e-5?
    - w1ntermute 13y ago
      No, the probability I calculated is the probability that at least one of the companies will succeed if you start N of them, or 1-(1-0.00006)^N
  - marcosdumay 13y ago
    Unless your definition of sucess is a bit more flexible than the one of the article... If that happens there are small improvements to your chances. But then, it's a dificult calculation. The more capital you apply at the company, the more money you must take out of it.

pouzy 13y ago

I'm not sure that we can compare that to having a chance to win the lottery or get struck by lightening. There's a bit more than just luck in the whole equation, but luck is definitely a factor

besquared 13y ago

A ratio without a denominator is useless.

besquared 13y ago
That reply might be off topic for the article. I just think the headline isn't topical in any way. It saddens me.

periferral 13y ago

Any idea how he comes up with $73k/yr? He says 3 members, 49 months and I'm assuming he means $1b. By my calc that is still $8m/y.

lionheart 13y ago
Well, probably the 3 split a small percent of the final equity because of dilution from investors.
- jeremyt 13y ago
  If you are a founder in a company that sells for a billion dollars, and you only come out of it with 300,000, that's an almost criminal level of incompetence. That's .03%. Assuming you start from some whole number of percentage ownership, it's almost impossible to get diluted that low. You would need something like 10 rounds of 50% dilution.
  - periferral 13y ago
    i agree. sounds like something emp #300 should walk away with.

darkchasma 13y ago

That doesn't seem right, that's a better chance that dying in a fire.

saosebastiao 13y ago

It is an interesting article and I agree with the subject matter (just wanting to do a startup is not reason enough), but I wanted to comment on the title: 0.00006% is a prior distribution. I wouldn't be surprised if the success rate posterior goes up an order of magnitude with something as minimal as a 4 year degree. Which is still a really small number...but it drastically changes your expected value.

MJR 13y ago
Or something like the type of business. A local service-based business like a hair salon, diner or hot dog cart shouldn't even be considered as a business that has the possibility of being worth a billion dollars. If this is based on total number of registered businesses, removing the large number of established small businesses that have been in business for X years would help arrive at a better number.
arbuge 13y ago
There is a good analysis of this in Felix Dennis' book (How to Grow Rich). I don't remember what number he came up with, but after narrowing things down he clearly showed that the chances of success are actually far higher than the prior distribution.
- a8da6b0c91d 13y ago
  Felix Dennis is such a refreshing and honest break from all the ditzy California "change the world" and "passion" fluff. If I recall correctly he opened up with the following quotation: "Get place and wealth, if possible with grace; If not, by any means get wealth and place." --Alexander Pope
- maerF0x0 13y ago
  nb: the book is "How to get rich" www.amazon.com/How-Get-Rich-Greatest-Entrepreneurs/dp/1591842719

deleted 13y ago

[deleted]

tanglesome 13y ago

That's still a lot better shot than you can get from most lotteries.

huherto 13y ago
Is it more effort than buying a lottery ticket ? ;)
Retric 13y ago
Not really, assuming your opertunity cost runs around 40k then spending 40k on MegaMillions gives you about 0.02% chance of hitting the jackpot.

linux_devil 13y ago

.00006% chance but 100% experience worth having .

mikeg8 13y ago
Great mentality.

Terretta 13y ago

I would assume this headline is "of all companies for which founding papers are filed in America". That seems a poor statistic to use when 65% of Americans try to start a business at some point. A more meaningful number might be % chance among companies who received venture funding. A funding event represents a concrete shift in probability of success. Does anyone commenting here know the probability of, say, a $10M, $100M, and $1B exit after a Silicon Valley funding event (funding from recognized VC)?

jsonne 13y ago
Also notable that 57% of US businesses are freelance/consulting. (Aka one owner and no employees)
mikeg8 13y ago
Couldn't agree more. Another factor that popped into my head: how many people start businesses with billion dollar aspirations? If you open a bike store, restaurant or mom-and0pop shop, chances are you aren't even trying to turn them into billion dollar companies.
ccarpenterg 13y ago
I think a bayesian approach is more suitable: P($1B company | you're in SV, $100MM in funding, etc) Think about a bayesian network and its joint probability.
drusenko 13y ago
13% of VC-backed startups exit for over $10M, 5% exit for over $50M, and 2% exit for over $100M, although there are many different studies with slightly different numbers: http://www.quora.com/What-is-the-truth-behind-9-out-of-10-startups-fail http://www.quora.com/What-is-the-truth-behind-9-out-of-10-st...
- mason55 13y ago
  Those numbers are all surprisingly high

deleted 13y ago

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ck2 13y ago

You could just bottle water and add some government subsidized corn syrup to it. Buy a billion bottles of water for a penny a bottle and sell it for $1. Then instead of paying taxes, get checks from the government for pretending to hire people for decent jobs while keeping their wages so low that they have to use taxpayer funded food and medical assistance. Tada. The "American Way" to become a billionaire.

JamesArgo 13y ago
Competing with Coke and Pepsi, the surest way to make a billion...
- mercurialshark 13y ago
  Ha!
- fizx 13y ago
  Vitamin water's 4+B acquisition was about 5 years ago. http://www.nytimes.com/2007/05/26/business/26drink-web.html?_r=0 http://www.nytimes.com/2007/05/26/business/26drink-web.html?...

yesplorer 13y ago

In other news, meaningless statistics are up 17% in the past 24 hours... A completely irrelevant headlines for such a nice article. Sad. You lumped all start-ups together and struck a percentage. Did you consider that there are 1000s of people who are doing what they do not because they want a chance to build a billion-dollar company but rather a chance to providing real solutions to real problems? People do what they do because they love what they do and as long as it is sustainable they want to be working on it without thinking about some mythical billion-dollar mark.

luketych 13y ago

Most of your chance at success was already determined by your genes and the way you've lived your childhood. Ideas aren't successful, people are.

gohrt 13y ago
And the wealth and power of the people your parents are friendly with.

misiti3780 13y ago

Elon Musk must be super lucky --> .00006^3 = 2.16e-13 (although this calculation assumes the chances are completely independent, which studies have show, they are not)

izendejas 13y ago
Right, that's just a prior. His probability is much higher given that he had two prior exits, is incredibly intelligent, his network is vast and resourceful, etc. Very much off-topic, but he's an anomaly in many ways...eg, I was incredibly amazed to learn that he and his former wife had twins and triplets. Wonder what the chances of that are. :)
- misiti3780 13y ago
  given who their dad is - i wonder what the chances of them being successful entrepreneurs are :)

001sky 13y ago

This headline is just self-serving. The article is about a $1B company, and this headline is simply a strawman to tear down. The rhetorical "synopsis" here is that (1) sucess is impossible; but (2) oh wait, i just did that without breaking a sweat. Here is my 3 step solution to success {...}

JumpCrisscross 13y ago

Gompers et al published a paper in 2006 [1] which studied a database of "firms that have obtained venture capital financing" between 1976 and 2000. Defining "'success' as going public or filing to go public by December 9 2003, "they find the overall success rate on first time ventures is 25.3%. Not surprisingly, serial entrepreneurs have an above-average success rate of 36.9% on their first ventures: venture capitalists are more likely to be more enthusiastic about financing a successful entrepreneur than one who has previously failed. It is more interesting that in their subsequent ventures they have a significantly higher success rate (29.0%) than do first time entrepreneurs (25.3%)." Note that the 99th percentile of valuations in this data set was $131.5 million. Additionally, the data comes from a period of lower competition for "doing a startup". Finally, one must account for survivorship bias that would be present in a 1976-2000 data set of venture capital financing. [1] http://businessinnovation.berkeley.edu/WilliamsonSeminar/scharfstein041207.pdf http://businessinnovation.berkeley.edu/WilliamsonSeminar/sch...

mercurialshark 13y ago

Good thing we are only going for a hundred million at the moment.

pg 13y ago

It's a fallacy (though a very commonly held one) that if x% of people succeed at some task, the chances you will succeed are x%. That's only true for tasks where aptitude is not a factor.

wslh 13y ago
The competition factor is also very important: if the world population (and entrepreneurs) growth by 400% it is possible that the "same" few companies will reach the billion (adjusted by inflation)
ScotterC 13y ago
However, it's quite easy for us to believe our aptitude will make us the exception. Adding a numerical grain of salt is helpful for the evaluation.
jpwagner 13y ago
sort of. if i have 10 coins, 9 of which have 44.4% chance of heads and 1 has 100% chance, choosing a coin at random and flipping it has 50% chance of heads overall. sure, there is one outstanding coin. the "fallacy" is true when you look at the whole rather than the individual factors, which include aptitude in some cases so i guess you're correct on the last point.
TheBiv 13y ago
Color me dense, but I don't understand this point. The author clearly had aptitude to be successful, but if we were to randomly put a percentage on his aptitude that weighted him above the average, it would still probably be less than 0.00%
- gdubs 13y ago
  It means that statistics are useful until you try to apply them to an individual. While a statistic may hold true for an entire population, the converse does not logically follow for an individual. I think the fallacy may be "over generalization".

thors_hammer 13y ago

It seems to me that the claim he makes re $73k per year is misinterpreting the study he is basing it on. His claim: "Even if you do raise money and sell a company or take it public, your median time to doing that is probably 49 months. Assuming there are three founders, your median expected payoff would be $300,000 each — that’s the equivalent of $73,000 a year." Based upon his Stanford talk (http://www.youtube.com/watch?v=m2sj-U2QSHs http://www.youtube.com/watch?v=m2sj-U2QSHs at approx. 27:15), these calculations are based upon the paper "The Incentives To Start New Companies: Evidence From Venture Capital" by Robert E. Hall and Susan E. Woodward (http://www.nber.org/papers/w13056 http://www.nber.org/papers/w13056). From Pg. 2 of the Hall/Woodward paper: "Our most important ﬁnding is that the reward to the entrepreneurs who provide the ideas and long hours of hard work in these startups is remarkably small, once risk is taken into consideration. The contract between venture investors and entrepreneurs imposes the burden of the idiosyncratic risk of a startup on its entrepreneurs. Far from shifting the risk toward the diversiﬁed investors, the contract exacerbates the risk the entrepreneurs face. Although the average ultimate cash reward to the entrepreneurs of a company that succeeds in landing venture capital is $9 million for the group, most of this expected value comes from the small probability of a great success. With a coeﬃcient of relative risk aversion of 2, the entrepreneurs would sell their holding as of the time they receive venture funding for about $900,000 to avoid the undiversiﬁed risk of their claim on the company. It seems to me that this $900k figure (which is the basis for the $73k per year figure) is based upon a scenario where the entrepreneurs sell "as of the time they receive venture funding" and not a scenario where "you do raise money and sell a company or take it public." Isn't the $900k figure referring to a risk-adjusted founder sale a much earlier stage in the process? Also, from page Pg. 20 of the Hall/Woodward paper: "The median time from ﬁrst venture funding to exit in our data is 49 months. We do not have data on the typical number of entrepreneur-founding shareholders, but we believe that three is probably representative. The return based on the $900,000 ﬁgure is a little over $6,000 per entrepreneur-month. The extreme idiosyncratic risk of venture-backed entrepreneurship and the inability of the venture contract to insure entrepreneurs against the risk result in a tiny incentive facing a prospective entrepreneur."

maerF0x0 13y ago

It seems silly to me that people spend money on spurious insurance. You're effectively betting in a Casino (you're not the house). Unless you think you have some sort of edge on their team of actuarials, or you think you're an outlier (w/ exceptionally bad circumstances), you're better off keeping the premium (along with its expected profit). I suppose if you want to be super technical, you should weigh the risk/reward factor of the profit margin in the costs and the value that would be paid out. I'd argue few of us are capable of doing that math well, nor would it be profitable to spend our time doing it (because we have a business to run/build) In my case, the only insurance I carry is that which is required by law, or offered for "free" (eg, employer paid insurances). I'd still prefer to have my money. I'm betting that Im quite normal.

a8da6b0c91d 13y ago
You would go uninsured rather than get catastrophe health insurance? You do realize that in America an uninsured trip to the emergency room with trauma means bankruptcy. Farmers hedge risk for the same reason. A cash crunch could put them out of business. But now that I think about it I can't guess what this weather insurance offers farmers that the commodity futures markets don't.
- maerF0x0 13y ago
  I think you hit on the breaking point for me. The point is even if I went bankrupt I could come back. But if I cant afford the surgery that saves my life, there's no coming back (that I'm aware of). So yes, when I travel abroad I do buy health insurance. But I dont carry tenants insurance (for my possessions) or buy other insurances... I guess if I were so leveraged like a farmer I'd have more fear. But i have almost exactly $0 debt at any given time meaning even if I were to lose my job, I'd be fine. If I had 4 kids and a mortgage and a tractor payment and... and.. debt and leverage, I guess I'd be a lot more worried.
notahacker 13y ago
The insurance isn't necessarily "spurious" if the adverse weather is an existential risk to the business, which it might be for farmers in particular. Sure, you might be better off saving to cover predictable small losses to one crop from a bad winter every few years, but it's probably practical to cover the one in 30 year drought that kills everything. You'll regret bankruptcy if the drought dries up your bank balance before you've saved enough to cover the risk so much more than the opportunity cost of paying out premiums for a drought free half-century. Similarly, paying hefty premiums to insure cheap consumer goods like mobile phones that you could replace for the cost of 12 months premium plus excess isn't a smart move unless you're especially clumsy, forgetful or liable to be mugged. But a non-wealthy person not getting affordable insurance for lifesaving treatments[1] is crazy (even after factoring in the insurer's margin, and interest on savings you're still gambling on your lifetime treatment costs being not much above the average for a person like you and the bills not coming before you've saved enough - two things which your insurer doesn't care about at all if he's pooled risk well enough.) Not playing Russian Roulette also has a negative ROI... [1]or living in a country with decent public healthcare

betadreamer 13y ago

Good point in the article about how people should not start a startup by saying they are going into startups. Many of my friends (including myself) made this mistake :P Problem, Solution, and then the rest ...

sirkneeland 13y ago

Well I suppose that still makes it .00006% likelier than my becoming a billionaire by being an employee at a Fortune 500 company.

blibble 13y ago
just don't look at the expectation

Synroc 13y ago

I urge everyone to ignore the title for what is actually a well-written interesting (at least to me) article.

OldSchool 13y ago

I imagine that many people on HN would wither in a six-figure corporate job, and virtually all are aware of the rarity of the $1B exit. I'd take a self-sustaining entrepreneurial situation over the day-to-day corporate grind any time. You're still a rare hero if your exit is $100M or "only" $10M. Even a $1M payout would put you ahead about twenty years compared to that corporate job, provided you don't live like it's your new salary.

morewillie 13y ago

So you're telling me there's a chance! -Lloyd Christmas

tpowell 13y ago
I came here to write this.
raverbashing 13y ago
It's even bigger than most lotteries.

larrys 13y ago

"Just look at the numbers, he says: “There’s a 0.00006% chance of building a company that will grow to be worth more than a billion dollars. Even if you do raise money and sell a company or take it public, your median time to doing that is probably 49 months. Assuming there are three founders, your median expected payoff would be $300,000 each — that’s the equivalent of $73,000 a year. And the probability of making nothing is 67%. So if your motivation for doing a startup is financial reward, you’re better off going to Google, a hedge fund, choosing a career with stable income potential.” I guess I'm curious how such an obvious typo could appear here. They mean 300m not 300k. But the rest of the paragraph is written in a "so what" way which seems to backup the "small" number.

cmurphycode 13y ago
"expected" payoff is the key, here. He's not just dividing a billion by 3.
- nostrademons 13y ago
  That's what I figured when I read the article, but his math is still off. If there's a 0.00006% chance of success, that's roughly 1 in 2 million. So your average expected payoff would be $1B/2M = $500. Divide by 3, and it's $166/founder, or $40/year. His math is very suspect in the first place, because 1 in 2 million is roughly what you'd get if you divide the number of billion-dollar exits by the population of the U.S. That's an odd way to slice it; if you want something more representative of an individual person's odds, you're better off dividing the number of billion dollar exits by the number of companies started that believe they have a shot at a billion dollars (which might be in the tens to hundreds of thousands, but certainly not 2 million), and then you end up with figures roughly equivalent to his AEPs, but that ignores that many of those founders are college or grad students and the outcome is getting that job at Google after all.
  - cmurphycode 13y ago
    Yep, the math makes no sense if you assume the two options are 0 or 1B. I guessed that he was using the actual outcomes of the entire spread- considering that he references the 67% chance of $0 shortly thereafter, it is clear he doesn't think the other 99.999.... percent result in $0. Even if my excuses for him are correct, I think you all have made a valid point that this is not a really productive way to measure :) Nonetheless, the lesson "don't start a company to get rich" is, I think, a good thing to say.

eloff 13y ago

Never tell me the odds - Han Solo

peterjancelis 13y ago

Terrible title, but one of the best articles I've read in a long time. There are some pretty profound quotes in there.

ffrryuu 13y ago

Might as well play the lottery!

ph0rque 13y ago

Great article, although it probably should be titled something like, "How to build a company solving hard problems". Very inspirational for my side project, AutoMicroFarm (http://automicrofarm.com http://automicrofarm.com). One thing my co-founder and I will do this week is break down the problem we're solving into known unknowns, and figure out a way to get them into the "known" category quickly and efficiently, so we can "grind and innovate" faster/cheaper.

j45 13y ago

One interesting thing in this article is the statement that a billion dollar company leaves the founders with $300,000 each. Am I the only one surprised by this?

mindcrime 13y ago

This article turned out to be a lot more than I expected. From the headline, I was expecting more of a "buzzkill" article, full of negativity and basically saying "don't bother trying". But it is actually more of "Yeah, the odds are very against you, but, nonetheless, here are some ways you can optimize things to favour you as much as possible". The part about "The Grind" reminds me a bit of the classic pg essay: "How Not To Die".[1] (My personal favourite, out of all the pg essays I've read). I love this pg quote, as it's full of inspiration and is about as motivating a quote as I know: "If you can just avoid dying, you get rich. That sounds like a joke, but it's actually a pretty good description of what happens in a typical startup. It certainly describes what happened in Viaweb. We avoided dying till we got rich." [1]: http://www.paulgraham.com/die.html http://www.paulgraham.com/die.html

dynofuz 13y ago

im gonna do it!

drakaal 13y ago

I disagree with the "Know what you don't know". Building a billion dollar company is about knowing what others don't know. If it were simply a matter of knowing what others don't someone would have already beat you to it.

mesozoic 13y ago

So you're telling me there's a chance?

Siecje 13y ago

Why wouldn't you just save money when you are making it instead of paying for insurance and having to go through the hassle of filing claims?

AJ007 13y ago

Almost all of these comments are about the headline, but the actual article is really good: -Get rid of luck “When you say you got lucky, you got lucky because you didn’t know what was going to happen. The corollary is, if you know what’s going to happen, then there is no luck. There’s also no uncertainty and no risk,” Friedberg says. “In this context, shouldn’t your objective be to always know what’s going to happen? To always remove the unknowns?” You can see the world as one of superstition, luck, and magic, or you can see the world as one of logic and explainable order. Nassim Taleb had a few things to say about people using logic to explain random past events, and there is some truth to this as well (which incidentally is probably somewhat relevant to predicting nearly chaotic weather problems.) But, you can make manageable, hedged bets and discover truth to the reality today. The output will be a solved problem that makes customers happy. There are more opportunities today than I have ever seen before. There are more tools for people to solve these problems than ever before. Look at waste, look for inefficiencies, and remove them even just a little bit at a time. You don't need to build a billion dollar company. But, if you do an excellent job at fixing that small problem, you might end up with a billion dollar company. A lot of companies make money through introduction of waste, inefficiency, and confusion. They fatten their short term margins while erasing their companies long term viability.

avalaunch 13y ago
Get rid of luck was one good point the article made. The other was to do something meaningful. This is one time I wish someone changed the title of the article. It's just silly link bait that hides a really good article.

clienthunter 13y ago

More accurately, if you randomly select a company ex post from the sample used to make that headline, the probability of said company having been sold for 1B USD is 0.0000006. With the same conditions, the probability of the sperm that made you getting to the egg, however, was in the interval [0.000000001, 0.00000002]. This, by the way, means the probability of this particular combination of unique human beings alive today is somewhere around 1e^(-1.28e^11) - that is a "0." followed by approximately 128 billion zeros before you hit another number. The probability is so small that writing it out at one digit per second, without sleeping, would take approximately 4000 years. And yet here we all are. Don't make the mistake of thinking that any of that actually means anything beyond what it literally says.

ozi 13y ago

So you're twice as likely to get struck by lightening in a given year. http://www.wolframalpha.com/input/?i=.00006%25+probability http://www.wolframalpha.com/input/?i=.00006%25+probability

moodal1111 13y ago

The chances of winning in power ball with 10,000 tickets is around 0.000057 , (10000/175,223,510) . Who wants to pull in for that :)

cantankerous 13y ago

"Saying you’re going to do a startup or you want to be a ‘serial entrepreneur’ has about as much meaning as saying ‘I’m going to jump off a plane.'" I'd actually posit that saying you're going to jump off a plane has a lot more meaning than saying you're a serial entrepreneur. At least most folks have a grasp of what it means to literally jump off of an airplane.

officialjunk 13y ago

That's better odds than winning most CA lotto jackpots...

X4 13y ago

Challenge accepted.