Sun Dec 9 23:49:30 EST 2012

"How would I get started" and the problem of truth

I've been meaning to write about Hacker News again, but have held back, since it's a pretty boring subject outside of HN's rather shallow pool of users. But recent events have forced my hand.

"How would I get started?"

Last night on Hacker News, someone asked a simple question with a complicated answer: “I want to build a cable company. How would I get started?”

I’m really disappointed in the universally pessimistic and generally unhelpful answers this question received. Some people pitched some interesting ideas and helpful analysis, but most of the replies reinforced the notion that Hacker News readers are predominantly male know-it-alls and on the average, a bunch of snarky dicks.

Lots of emotional content here, but not much meaning. The attitude behind these two paragraphs becomes clearer if we look at some other quotes:

"Black Swan Farming"

In startups, the big winners are big to a degree that violates our expectations about variation. I don't know whether these expectations are innate or learned, but whatever the cause, we are just not prepared for the 1000x variation in outcomes that one finds in startup investing.

That yields all sorts of strange consequences. For example, in purely financial terms, there is probably at most one company in each YC batch that will have a significant effect on our returns, and the rest are just a cost of doing business. [1] I haven't really assimilated that fact, partly because it's so counterintuitive, and partly because we're not doing this just for financial reasons; YC would be a pretty lonely place if we only had one company per batch. And yet it's true.

To succeed in a domain that violates your intuitions, you need to be able to turn them off the way a pilot does when flying through clouds. [2] You need to do what you know intellectually to be right, even though it feels wrong.

It's a constant battle for us. It's hard to make ourselves take enough risks. When you interview a startup and think "they seem likely to succeed," it's hard not to fund them. And yet, financially at least, there is only one kind of success: they're either going to be one of the really big winners or not, and if not it doesn't matter whether you fund them, because even if they succeed the effect on your returns will be insignificant. In the same day of interviews you might meet some smart 19 year olds who aren't even sure what they want to work on. Their chances of succeeding seem small. But again, it's not their chances of succeeding that matter but their chances of succeeding really big. The probability that any group will succeed really big is microscopically small, but the probability that those 19 year olds will might be higher than that of the other, safer group.

The probability that a startup will make it big is not simply a constant fraction of the probability that they will succeed at all. If it were, you could fund everyone who seemed likely to succeed at all, and you'd get that fraction of big hits. Unfortunately picking winners is harder than that. You have to ignore the elephant in front of you, the likelihood they'll succeed, and focus instead on the separate and almost invisibly intangible question of whether they'll succeed really big.

"Why I now, unfortunately, hate Hacker News"

raffi 114 days ago | link

Most companies fail. It's a safe bet to predict failure. It's pretty lame to celebrate that failure from the sidelines.

Vision is not "how is this guaranteed to fail?" but how could it possibly succeed despite the odds?

A core tenet of hacker ethics, the zeroeth law perhaps, is being right, having correct perceptions regarding the universe. A map that matches the territory.

Under this ethical system, the above statement makes less than no sense. The most likely outcome is failure... but you shouldn't predict failure?

However, the way startup financing is currently organized, a VC fund can shrug off a dozen miserable failures to chase the one Google or Intel.

The purpose of Hacker News is to advertise Y Combinator startups, such as 9gag. The purpose is not to act as a prediction market. In fact, since one of the major routes of of startup profitability is being purchased by another company, accurate predictions of value are contrary to Y Combinator's interests. Y Combinator wants valuations as high as possible.

Someone starting a new cable company in 2012 is very likely to fail. This is the correct prediction: it is the outcome with the highest probability.

But a new cable company which somehow isn't immediately crushed, would have an enormous customer base, and could potentially make billions and billions of dollars.

To someone steeped in the Bay Area Startup lottery culture, this isn't an insanely stupid idea at all. It's almost a safe bet. With the force of millions of dollars behind you, being right is irrelevant.

Posted by Samuel Bierwagen | Permanent link | File under: important, nerdery