Black swans. Financing Bad Ideas

    Venture financier Sam Altman of Y Combinator shared his experience of financing startups at an early stage. He says that since 2010 he invested in about 40 companies, and now 5 of them have reached a good level of return on investment (100x or more).

    “I thought a lot about what these investments have in common, and how they differ from others,” Sam writes. “And the most noticeable difference is that, in my experience, few people wanted to invest money in them at an early stage.” There is some anti-correlation between the number of investors and the subsequent success of the company.

    One of these companies is Stripe, an online payment processing center, founded by 21-year-old red-headed kid Patrick Collison. The startup was planning - no more, no less - to challenge the banking system and accept payments online. In addition, the young programmer had no experience in the financial sector. It is not surprising that no one wanted to invest in this “hopeless” business.

    For reference, as of February 2014, the market value of Stripe was estimated at $ 1.75 billion .

    There are similar stories with three other startups, which, after the start of their activities, began to develop exponentially. For example, experienced investors said that Zenefits would not live for three months.

    That is, there is some strange trend. “I emphasize that if other investors say that the investment is bad, this does not guarantee success. In cases where my investment failed, they also warned me about it. Going against everyone and being wrong is still bad - you have to go against everyone and be right. ”

    Many great companies at first looked strange and incomprehensible to others. The bottom line is that if they initially look good, they will surely be overestimated, and they will finance other similar companies that will subsequently become their competitors.

    “I asked several other investors, and most are of the same opinion. Most of the most successful investments are in companies that were not considered promising. "

    Sam Altman believes that there are several reasons. First, the talent to raise money and the talent to manage a company are two different things. Secondly, many investors actually try to avoid risks, although they say the opposite, and great companies look very risky at an early stage. And most importantly, at an early stage it is very difficult to choose from a huge number of start-ups, where almost nobody wants to invest in money, and future great companies are often among them.

    Perhaps the most profitable option is investing in random companies ?

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