6 ms·

You also have to include the risk in your calculations. Let's say there's 5% (or whatever that is) chance for success, you have to divide $700K by 20 instantly.

by isalmon 13y ago

You also have to include the risk in your calculations. Let's say there's 5% (or whatever that is) chance for success, you have to divide $700K by 20 instantly. Nobody can guarantee you that any company with less than 100 employees is going to succeed and eventually be worth billions.

fizx 13y ago
Those companies were >80% chance of success at employee 50. Any of them have/had more chance of being worth $10B than less than $500M. So you really have to integrate over the probability curve to get an expected value, but I don't think the naive estimate of $700k oversells things.
- michaelochurch 13y ago
  Those companies were >80% chance of success at employee 50. I'm not sure I agree with that 80% figure and, even if, that's because the VCs have so much influence over the reputation of the company. (Indeed, that's why they have so much power over founders. They can turn off unrelated interest, which gives them extortive leverage.) Market manipulation at its finest. VCs are in the business of using their power over emerging, impossible-to-valuate companies' reputations to make millions for themselves. If Wall Street analysts did that shit, they'd be in jail.
  - tptacek 13y ago
    ... you say based on the zero Wall Street analysts who have gone to jail for doing what VC's do, but in other markets.
- boucher 13y ago
  An 80% chance of becoming worth $1 billion (liquidly) seems like a dramatic exaggeration to me.
- nl 13y ago
  Those companies were >80% chance of success at employee 50. Any of them have/had more chance of being worth $10B than less than $500M. Wow.. that's interesting. Do you have some data to back that up? The SV150 lists only 25 silicon valley companies that are worth over 10B[1]. Obviously that is incomplete data, but I'd be astonished to learn there are only 30 companies (ie, 25 + 20%) of Silicon Valley companies that have ever had more than 50 employees! Anecdotally I can think of more than 5 Silicon Valley companies that made it to 50 employees and then failed. [1] http://www.siliconvalley.com/sv150/ci_23055045/sv150-searchable-database-silicon-valley-top-150-companies-2013?RecordID=&PageID=2&PrevPageID=2&cpipage=1&CPIsortType=asc&CPIorderby=Market_value_March_28_2013 http://www.siliconvalley.com/sv150/ci_23055045/sv150-searcha...
  - fizx 13y ago
    Note that I'm talking about specific consumer startups with crazy growth before employee #50, not some entire class of startups. Rocketships only. The press estimates Snapchat's current employee count at 30. I think it's probably a bit higher. Imagine you've been in a cave, so you haven't heard that VCs aren't already $1B+ bullish on them. They show you their user numbers and offer you 0.07% to be employee #50. Aren't you stoked? I would be.
    - nl 13y ago
      Oh, so 80% of "winner" startups are won't fail. Good to know. But what about formally hot startups that didn't go anywhere. Take Friendster as an example...
      - fizx 13y ago
        I don't think its unreasonable to be able to pick 80% winner startups, as long as you're willing to wait long enough. As an employee, you only need one company every four years in your "portfolio." If you narrow to startups that have hit, say 50MM active users before employee #50, you might get to 50/50 success rate. If you analyze potential market size, red flags, comparable companies, and talk to three employees to get a sense of the internal workings of the company, it seems pretty reasonable that you can weed out most of the companies who are capped on their potential market, and the engineering or other disasters waiting to happen. Incidentally, I think friendster didn't hit 50MM actives. The semi-fails of the rocketship class are Zynga and Groupon, both of which still have market caps logarithmically closer to 10B than $500MM. Foursquare might be both a rocketship and a fail, but I'm not quite sure. Who else grew like mad in the last decade? I guess my core point is that you can tell really, really early whether something has very strong network effects, and if it does, the arbitrage is currently very easy.

by isalmon 13y ago

fizx 13y ago

Those companies were >80% chance of success at employee 50. Any of them have/had more chance of being worth $10B than less than $500M. So you really have to integrate over the probability curve to get an expected value, but I don't think the naive estimate of $700k oversells things.

michaelochurch 13y ago
Those companies were >80% chance of success at employee 50. I'm not sure I agree with that 80% figure and, even if, that's because the VCs have so much influence over the reputation of the company. (Indeed, that's why they have so much power over founders. They can turn off unrelated interest, which gives them extortive leverage.) Market manipulation at its finest. VCs are in the business of using their power over emerging, impossible-to-valuate companies' reputations to make millions for themselves. If Wall Street analysts did that shit, they'd be in jail.
- tptacek 13y ago
  ... you say based on the zero Wall Street analysts who have gone to jail for doing what VC's do, but in other markets.
boucher 13y ago
An 80% chance of becoming worth $1 billion (liquidly) seems like a dramatic exaggeration to me.
nl 13y ago
Those companies were >80% chance of success at employee 50. Any of them have/had more chance of being worth $10B than less than $500M. Wow.. that's interesting. Do you have some data to back that up? The SV150 lists only 25 silicon valley companies that are worth over 10B[1]. Obviously that is incomplete data, but I'd be astonished to learn there are only 30 companies (ie, 25 + 20%) of Silicon Valley companies that have ever had more than 50 employees! Anecdotally I can think of more than 5 Silicon Valley companies that made it to 50 employees and then failed. [1] http://www.siliconvalley.com/sv150/ci_23055045/sv150-searchable-database-silicon-valley-top-150-companies-2013?RecordID=&PageID=2&PrevPageID=2&cpipage=1&CPIsortType=asc&CPIorderby=Market_value_March_28_2013 http://www.siliconvalley.com/sv150/ci_23055045/sv150-searcha...
- fizx 13y ago
  Note that I'm talking about specific consumer startups with crazy growth before employee #50, not some entire class of startups. Rocketships only. The press estimates Snapchat's current employee count at 30. I think it's probably a bit higher. Imagine you've been in a cave, so you haven't heard that VCs aren't already $1B+ bullish on them. They show you their user numbers and offer you 0.07% to be employee #50. Aren't you stoked? I would be.
  - nl 13y ago
    Oh, so 80% of "winner" startups are won't fail. Good to know. But what about formally hot startups that didn't go anywhere. Take Friendster as an example...
    - fizx 13y ago
      I don't think its unreasonable to be able to pick 80% winner startups, as long as you're willing to wait long enough. As an employee, you only need one company every four years in your "portfolio." If you narrow to startups that have hit, say 50MM active users before employee #50, you might get to 50/50 success rate. If you analyze potential market size, red flags, comparable companies, and talk to three employees to get a sense of the internal workings of the company, it seems pretty reasonable that you can weed out most of the companies who are capped on their potential market, and the engineering or other disasters waiting to happen. Incidentally, I think friendster didn't hit 50MM actives. The semi-fails of the rocketship class are Zynga and Groupon, both of which still have market caps logarithmically closer to 10B than $500MM. Foursquare might be both a rocketship and a fail, but I'm not quite sure. Who else grew like mad in the last decade? I guess my core point is that you can tell really, really early whether something has very strong network effects, and if it does, the arbitrage is currently very easy.