
There's a .00006% Chance of Building a Billion Dollar Company - ca98am79
http://firstround.com/article/Theres-a-00006-Chance-of-Building-a-Billion-Dollar-Company-How-This-Man-Did-It
======
pg
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.

~~~
lelandbatey
While true, so, so much of your life is luck (or more accurately, good fortune
through chance, only affected by positioning). While your chances may not
exactly be 0.00006% that you'll succeed, I doubt that you can improve them to
more than about 0.0001%.

Truly, we don't get where we get because of our capacity or our ability (in
most cases). We get lucky, a lot, and we can't really change that.

~~~
pg
Though it's still a bit early to say, it looks like the probability of a YC
startup ending up worth a billion dollars is at least .5%. So the truth is
somewhere on the continuum between (a) that you're off by a factor of 5000,
and (b) that we improve people's chances by 5000x. And while it would be a
great compliment if people chose extremum (b), I think it would be a stretch
to claim we can improve the probability by even 10x.

~~~
beambot
You've just added information that will alter the probability. The prior can
still be 0.00006% _and_ the addition of new evidence (in the bayesian sense)
of being admitted into YC could result in a posterior probability of 0.5%.
(Sorta like using Series A as a filter.)

~~~
_dps
This only adds (Bayesian) evidence to an abstract frame of knowledge that
doesn't matter to anyone in real decision making processes: a frame in which
the observer uniformly samples all startups.

People who actually care about these odds (in the sense of betting on them)
are founders and investors. Neither, in their decision making process, gets to
(or wants to!) uniformly sample all companies.

PG's numbers are thus much more useful to anyone actually trying to make a
decision about a pool of investments: assuming the distribution of YC startups
is fixed over time, and you are someone like Start Fund who will bet on the
pool (i.e. equivalent to a repeated uniform sampling in expected value), the
0.5% is actionable information and the 0.00006% is not.

~~~
beambot
I don't disagree with you re:investors (or pg's numbers) who seek to obtain as
much evidence as possible so as to maximize their ROI. But priors do matter.

For example, if the prior on "making a successful company" (defined however
you want) were a vastly higher 40%, then I'd imagine a lot more laypeople
would take the plunge. Reading sites like TechCrunch makes it seem to the
layperson that building a successful company is much easier than it really is.
So yes, knowing that "mega success" is a massive outlier (to the tune of
1:1,000,000) is indeed actionable information to a layperson thinking about
starting a company without any additional evidence.

As the source article notes: The goal of the entrepreneur is to learn as much
as they can, thereby increasing their own odds of success (or minimizing their
odds of failure). Obviously, getting into YC massively improves your odds and
would probably be a good decision! As a YC alum, my advise would jive with
this observation. ;)

------
JumpCrisscross
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/sch...](http://businessinnovation.berkeley.edu/WilliamsonSeminar/scharfstein041207.pdf)

------
Terretta
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)?

~~~
drusenko
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-st...](http://www.quora.com/What-is-the-truth-behind-9-out-
of-10-startups-fail)

~~~
mason55
Those numbers are all surprisingly high

~~~
notahacker
They probably look less high if you compare them with the percentage of VC-
backed companies valued at $10M, $50M and $100M in their last round of
funding...

------
yesplorer
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.

------
AJ007
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
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.

------
ck2
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
Competing with Coke and Pepsi, the surest way to make a billion...

~~~
fizx
Vitamin water's 4+B acquisition was about 5 years ago.

[http://www.nytimes.com/2007/05/26/business/26drink-
web.html?...](http://www.nytimes.com/2007/05/26/business/26drink-
web.html?_r=0)

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

~~~
toblender
The entrepreneurs I know all do multiple startups, so any chance is better
then no chance :D

~~~
w1ntermute
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
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%

~~~
socillion
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.

------
OldSchool
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.

------
pouzy
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

------
larrys
"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
"expected" payoff is the key, here. He's not just dividing a billion by 3.

~~~
nostrademons
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
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.

------
luketych
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
And the wealth and power of the people your parents are friendly with.

------
thors_hammer
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."

------
linux_devil
.00006% chance but 100% experience worth having .

~~~
mikeg8
Great mentality.

------
mindcrime
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)

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

~~~
blibble
just don't look at the expectation

------
maerF0x0
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
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
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.

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

------
clienthunter
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.

------
drakaal
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.

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

~~~
Retric
Not really, assuming your opertunity cost runs around 40k then spending 40k on
MegaMillions gives you about 0.02% chance of hitting the jackpot.

------
ph0rque
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.

------
misiti3780
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
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
given who their dad is - i wonder what the chances of them being successful
entrepreneurs are :)

------
saosebastiao
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.

~~~
arbuge
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.

~~~
maerF0x0
nb: the book is "How to get rich" www.amazon.com/How-Get-Rich-Greatest-
Entrepreneurs/dp/1591842719

------
cantankerous
"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.

------
001sky
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 {...}

------
ozi
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)

------
betadreamer
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 ...

------
Siecje
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?

------
periferral
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
Well, probably the 3 split a small percent of the final equity because of
dilution from investors.

~~~
jeremyt
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
i agree. sounds like something emp #300 should walk away with.

------
j45
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?

------
moodal1111
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 :)

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

------
besquared
A ratio without a denominator is useless.

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

------
eloff
Never tell me the odds - Han Solo

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

~~~
raverbashing
It's even bigger than most lotteries.

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

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

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

------
ffrryuu
Might as well play the lottery!

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

------
X4
Challenge accepted.

------
dynofuz
im gonna do it!

