Matt Maroon - But Seriously

by joshstaiger • 18 years ago

63 61 18 years ago

timr• 18 years 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• 18 years 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...

jedbrown2• 18 years 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• 18 years ago

The vertical scales don't match, was the thrust of the comment.

run4yourlives7• 18 years 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.

nostrademons2• 18 years 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.

fallentimes6• 18 years 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.

run4yourlives7• 18 years ago

Well, that depends on the individual situation. A micro-ISV could bring that number as low as a reasonable salary. A startup like 37Signals needs to have that number high enough to support a small number of employees. Of course, a VC backed firm counting on a grand exit needs a much greater reward.

I think what Matt correctly points out though is that by limiting yourself to the VC option, you are only seeing 1/3 of the avenues available to you. These are limits for the VC, but they don't need to be limits for a founder.

mattmaroon12• 18 years ago

Only because the market ensure we have to though. We'd rather take on greater rewards with no more risk.

mtw2• 18 years ago

can we settle for a high return and a very low variance? :)

run4yourlives7• 18 years ago

Um, no. :-)

webwright2• 18 years ago

Not always true. There is the rare founder who is an "empire builder"-- the kind of guy who wants to do crazy ambitious things like build a railroad across the country (or the software equivalent). Bill Gates and Mark Zuckerberg would both qualify-- both have had ample opportunity to walk away with $30m.

These are the founders that investors want (including YC) - the $30m exits are just to "keep the lights on" if you do the math.

fallentimes6• 18 years ago

Right, but you're focusing on the exception. He's focusing on the rule.

I'd like to see a VC firm that kills it from dividend payments instead of _soley_ exits/IPOs (maybe one exists?). You'd need some very "open" limited partners.

axod• 18 years 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)

tdavis2• 18 years 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.

run4yourlives7• 18 years 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.

mattmaroon12• 18 years 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.

LogicHoleFlaw2• 18 years 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?

mtw2• 18 years ago

not really, flickr, stumbleupon, clubpenguin started when .com bubble crashed.

crises do spurr ground-breaking technologies and new ways

olefoo2• 18 years ago

Starvation is a spur to success.

run4yourlives7• 18 years ago

Actually, you probably have the best timing ever unless you want your name associated with things that people gnash their teeth at. :-)

netcan3• 18 years ago

Right?

I wouldn't say that. It might be the best time a company. It's not a good time to sell one.

netcan3• 18 years ago

Maybe a good time to buy one?

petergroverman• 18 years ago

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

-P

volida• 18 years 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?

fallentimes6• 18 years ago

Day 75. Revenue since Day 3.

webwright2• 18 years ago

Only if Day 1 was launch day (which it never is). Don't do funny math. :-)

mattmaroon12• 18 years ago

It isn't easy, but it's far easier. I know lots of people who've done it (hell, I have a couple myself).

briancooley• 18 years 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.

tdavis2• 18 years ago

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

jedbrown2• 18 years ago

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

brent• 18 years ago

All probability density functions must integrate to 1.

newt0311• 18 years ago

Thank you for figuring that out.

mattmaroon12• 18 years ago

That's true. I realized the left side of the curve had to look different.

zhyder2• 18 years 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&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.

mattmaroon12• 18 years 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.

rincewind• 18 years ago

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

mattmaroon12• 18 years ago

That made my brain hurt.

aston3• 18 years 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.

mattmaroon12• 18 years 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.

aston3• 18 years 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.

akd• 18 years 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.

mattmaroon12• 18 years ago

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

Matt Maroon - But Seriously

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