

Matt Maroon - But Seriously - joshstaiger
http://mattmaroon.com/?p=557

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timr
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.

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nuclear_eclipse
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...

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jedbrown
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.

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axod
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)

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run4yourlives
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.

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run4yourlives
_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.

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nostrademons
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.

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fallentimes
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.

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nostrademons
I always took it as a given that employees will not get rich off an
acquisition, unless the company is a Google or Netscape or Stratus (and even
then, only if they were management-level and hired fairly early on). I did the
math on my last equity offer (as an employee; not counting cofounder offers):
I would've ended up with about $5000 worth of stock in a best-case (~50M)
acquisition. My former coworker was an early employee of CCBN, purchased for
$40M: he ended up with $3000.

Both founders and employees need to be very aware of the different risk/reward
structures for each. I've heard some founders complain about how hard it is to
get decent, hardworking help. Well, of course it is - their upside is 1/10th
of yours! And their downside is lower as well, since they usually take a
market-rate salary. People are less inclined to put in herculean effort if
they have no incentive to do so.

For employees, be very cognizant of how much risk the founder has actually
eliminated and make sure that fits with the reduced reward. It's really,
really hard to build something people want: if they've already done so, they
deserve every bit of those outsize founder stakes. But if all they have is an
idea and some VC funding, they're asking you to bear many of the same risks,
yet leaving you with much less of a reward.

The takeaway, IMHO, is don't hire and don't take VC money until you have
product/market fit. That gives your employees a risk & upside profile inline
with their equity stakes. It also gives your VCs an acceptable return without
them forcing _you_ into taking outlandish risks, eg. going after that pie-in-
the-sky market opportunity.

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rams
Hmmm ... those numbers are kind of depressing. But I had kind of come around
to the same conclusion. Unless you are a founder, it's just not worth it most
of the time.

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netcan
Depressing? All this are saying is: Unless you're a founder, you're an
employee. Earlier employees are closer to the founder end, later employees are
closer to the employee end. Neither are probably going to retire at 23 from an
early acquisition. The latter are probably not even gonna retire from a
monster exit (though in this case there are probably more employees, _early_
is relative).

They do have a chance at making quite a lot of money though. 3k/40m is less
then 0.01%. So it's not really a big part of the compensation package. In that
case, stock just isn't a reason to work there. There may be other reasons to.

It's depressing that being in the vicinity of a startup doesn't make you rich?
If everyone was rich, it wouldn't be rich. By definition, it's not available
to everyone. You think market rates + a 50% chance at being millionaire,
should be the going rate?

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aston
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.

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mattmaroon
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.

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aston
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.

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mattmaroon
VCs also can stand the variation because they get paid even if they fail. Were
VCs paid only a % of the profits, and had to reimburse for failures at the
same rate, you'd see their risk tolerance drop greatly.

~~~
aston
Also true, though their LPs _do_ get paid only on the profits (less the
aforementioned management fees). If they weren't comfortable with the risk,
they wouldn't invest, right?

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mattmaroon
Yeah, though they can invest in many high risk VC funds much the way VCs
invest in many high-risk startups. Harvard's endowment, for instance, is ~$35
billion. They're risk-tolerant on a level that Sequoia can only have wet
dreams about.

So though VCs will be less risk-tolerant due to sample size than
entrepreneurs, LPs will be that much less than VCs. Even the best VC firm is
only a few poorly-performing funds away from the scrap heap.

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brent
All probability density functions must integrate to 1.

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zhyder
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...](http://www.dabbleboard.com/main/public?created=dummy8&myid=4)

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.

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mattmaroon
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.

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zhyder
IMO abandon ship == near-$0 valuation. Although I didn't know about the 1/3
odds of a mediocre return (defined as 1x?) for VCs. The main point of my
(admittedly still simplistic) graph was that the VC probability distribution
is bi-modal.

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mattmaroon
I would assume mediocre meaning something like 5.x-2x or something. I don't
remember exactly, but I definitely know that startups that fail are often sold
and VCs get some money back. And some that didn't fail but didn't really
succeed and don't appear to have much potential sell for not a lot either.

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LogicHoleFlaw
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?

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

crises do spurr ground-breaking technologies and new ways

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olefoo
Starvation is a spur to success.

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rw
Starvation eliminates the ability to execute on hard tasks.

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olefoo
Maybe that should be read as "The PROSPECT of starvation is a a spur to
success."

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

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mattmaroon
That made my brain hurt.

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briancooley
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.

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

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volida
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?

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fallentimes
Day 75. Revenue since Day 3.

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

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fallentimes
Nope. Day 60 was our public launch day.

We actually had revenue before we were launched from our blog (no actual site
was even up). It was a pile of shit.

Two Stone Temple Pilots tickets I believe.

~~~
run4yourlives
Curious, once you get bigger you're going to butt up against all of the anti-
scalping laws that are up there, as well as the ticketmasters of the world
that are going to contend that you shouldn't have the right to complete with
their monopoly. Have you thought about what strategies you'd use at that time,
and if so, would you care to share them with us?

This is purely for my own curiosity, I don't have interest in this space or
anywhere remotely close to it.

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fallentimes
Short answer: No we won't because it's not our problem.

Long answer: We don't carry any inventory or process any transactions - we
just show the results of others. Our ticket providers could run in to problems
(they have in the past already), but enough deals exist that we'd still have
ticket providers.

Stubhub, Viagogo, Ticketsnow, Seatexchange, Ticketmaster et al are already
working on agreements with the teams/leagues. For example, MLB has already
signed a deal with Stubhub.

Ticketmaster/Ticketsnow is one of our providers. They are not a direct
competitor because they are a primary ticket market - we are a secondary
ticket market aggregator. Our main competitors are TickEx, Ticketwood &
Fansnap along with some unlaunched ones I'm not supposed to know about it.

Most places ignore the anti scalping laws because they're retarded. When
demand exceeds supply, prices go up. No one ever complains about all the below
face value tickets found at most NBA and MLB games.

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run4yourlives
Great answer, thanks. You certainly know your marketplace! :)

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akd
> 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.

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

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

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

-P

