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Paul Graham is the cofounder of Y Combinator, Silicon Valley’s most influential early stage startup investing firm.Graham is a Professor X figure to a host of Silicon Valley engineers (who, if you think about it, are a type of wonderful mutant.)
In the post, Graham says startup investing is hard for two reasons: “(1) that effectively all the returns are concentrated in a few big winners, and (2) that the best ideas look initially like bad ideas.”
The first point is totally true. YC startups in aggregate are now worth $10 billion, two thirds of which is made up of two startups. This means that VCs can’t bet on companies they think will succeed; they have to bet on companies that will succeed insanely well – even if most of them are likely to fail. It’s hard to practice that kind of risk tolerance.
But that second point, the one about bad ideas, is the really interesting one.
If a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realise are good. Which is not that far from a description of insanity, till you reach the point where you see results.
The first time Peter Thiel spoke at YC he drew a Venn diagram that illustrates the situation perfectly. He drew two intersecting circles, one labelled “seems like a bad idea” and the other “is a good idea.” The intersection is the sweet spot for startups.
This concept is a simple one and yet seeing it as a Venn diagram is illuminating. It reminds you that there is an intersection—that there are good ideas that seem bad. It also reminds you that the vast majority of ideas that seem bad are bad.
The fact that the best ideas seem like bad ideas makes it even harder to recognise the big winners. It means the probability of a startup making it really big is not merely not a constant fraction of the probability that it will succeed, but that the startups with a high probability of the former will seem to have a disproportionately low probability of the latter.
History tends to get rewritten by big successes, so that in retrospect it seems obvious they were going to make it big. For that reason one of my most valuable memories is how lame Facebook sounded to me when I first heard about it. A site for college students to waste time? It seemed the perfect bad idea: a site (1) for a niche market (2) with no money (3) to do something that didn’t matter.
One could have described Microsoft and Apple in exactly the same terms.
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