Why not help him evaluate his revenue model instead of dissuading his passion?
Your lottery analogy implies that you believe his ability is not at all bound to his success, so it's either flawed or you're just trying to hurt his feelings.
It's clear that risk lowers safety levels, but everybody's level is different and it's a very non-transferrable threshold.
I've been there.
Not trying to dissuade entrepreneurs or reduce their passion at all -- quite the contrary.
Am suggesting that if attempting to build a real business, one should stay away from the "lottery ticket" style ventures and be more focused on the fundamentals.
The safest solution is to work for an already profitable company, or build one just like it. The term, “real business” is also based on a threshold which varies individually.
The EV equation is indeed simple. If you want to maximize probability you must minimize profitability, thus Paul Graham’s essay, “Inequality and Risk”.
I just don't buy the "risk is bad" outlook on life. It's awfully pessimistic and reinforces potentially obsolete paradigms. I love your blog though.
Dude, provide an auto-discovery RSS feed. Its easy email me and I'll tell you how.
The situation is even worse than you suggest, as your expected value calculation implies complete risk-neutrality and no loss aversion. Betting $50,000 for a 1/1000 shot at $50million isn't something most people would do unless they were quite rich and enjoyed gambling.
There's also the time-value of money and opportuinty costs to consider.
You seem to imply (at least it comes across to me) that MySpace etc are not "real business". The NYT artile mentions that MySpace generates about $200M in ads rev (not as much as yahoo with similar pageviews, but still).
I think the lesson is that it is not about how cool your website looks but how you can attract uses. In case of MySpace, they discovered music/band is the key driver. They started MySpace Secret Concert and was a big hit.
Except expected value is the sum over all such outcomes.
I think you've made some very good points. In most cases, people's sites/businesses will not amount to much and will probably fizzle out. Although, just because you may never get that life-changing offer from Google or Yahoo, that's not say that you can't make a living from it. I do appreciate your realistic perspective on the subject.
I can appreciate your realistic perspective toward the notion of selling a web app to google or yahoo. However, there is a fundamental difference in the way you (the author) look at the situation.
From the sounds of this article you are probably not an entrepreneur, rather something such as an engineer. You reduce it to simply chance, and compare it to a lottery ticket (which is 100% chance). A young entrepreneur's biggest hurdle in starting a business is overcoming limitating beliefes set by those who cannot 'think big'.
A persons business is like a mirror into their self, their strengths and weaknesses, their will and their vision. That's why for entrepreneurs often have large and healthy egos, since that is what launches them and the business to success.
While yes, there are many businesses that are not going to amount to anything, it is the process of creating businesses and having them fail which ultimately evolves the entrepreneur and leads him to achieving success.
I agree to not 'put all your eggs into one basket' and to have a backup plan if your business is not successful. However, the notion that a person should throw away a dream simply because of past 'statistics' is not condusive to creating and building a business.
"I would rather aim for the stars and fall in the mud then aim for the mud...and make it" - famous quote (can't remember who). Thanks for the article.
Looks like I have once again failed to correctly articulate my point.
I have nothing against entrepreneurism (I am one myself and working on my third company now).
My primary point is that the path of many contemporary startups that forego revenues and profits and instead focus on some eventual acquisition are not the best way to build businesses.
Guess what I'm trying to say is that the market rewards actual value creation and this takes a fair amount of work.
Need to practice properly articulating my point. :)
I think you articulated your point just fine. It is good advice: don't count on hitting the jackpot, instead build a business to last. It was crystal clear to me and it makes sense. Some people just aren't used to this kind of reason and logic coming from an entrepreneur.
Yes I definitly agree, the market rewards actual value, not percieved value. Very good point, however, I just think the underlying way you communicated it seemed a little harsh. Perhaps there would be a way to communicate this point with a different spin. Congrats on starting your 3rd company.
Are you sure you're good at math? You wrote: "Even if you are 10x or 20x “better” than average, that likely still doesn’t make..."
Do you realize how much better stats like 10x and 20x really are? If you came out with a car that got 10x better gas mileage, would anyone notice? Hey, man, my new Honda gets 350 miles per gallon, about 3500 miles on a tank of gas!
So can I get funding on my invention of a 350 mile per gallon car? I think so.
I am by no means a math expert, but lets not confuse *you* being 10X better/smarter, etc. with the outcome (your product or business) being 10X better.
Just because an individual is orders of magnitude "better (on whatever dimension) does not mean this translates to similar effects in the things they create (like their businesses).
I'm actually thankful for this, as I'm not nearly as smart as other people, but my outcomes turn out to sometimes be modest successes.
Can you please give a link to the mentioned PhD thesis (or it's author and thesis name). It sounds really interesting and is close to my research area. Thank you in advance.
Here is a link to the paper cited:
I'd like to respond by saying the question of the widespread fervor to create spin-offs start-ups is a great thing, on a social/darmwinian level, even if most of them fail. So that while your points are well-taken in terms of the low odds for an individual entrepeneur or hacker, the process of many contributions to to the application pool is a sign of health of the system.
The bubble 2.0 phenomenon is also interesting in terms of what it says about the state of the "tech economy" as a labor force. That is, how is it that so many folks can afford to even consider 'making a go" at the big times (in the form of the vaunted google/yahoo buyout). Why isn't all of this energy going into degree accumulation and climbing corporate ladders? Is it simply that jobs are scarce, or is there a sea-change in terms of the way the tech worker sees herself -- as a more empowered worker-- ?
I agree to most points, but I tend to disagree to the argument as a whole.
Start-ups where you know what you're doing and love it are more likely to succeed than a idea picked up just cos you thought it was great. This should tilt the odds a bit.
Secondly, not many people are looking to be bought out for $50mn by biggies. A small scale working startup making you a $100k a year is a very healthy goal too. That should tilt the odds further.
Thirdly, it is would ideally be best to start out with more than one start-up. Four simultaneous start-ups means probablility of success goes up, four times.
Fourthly, as someone mentioned in the comments, unless your life depends on it, it's an experience. YOu will never not gain anything from it.
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