Black Swan Farming

Wait, it gets worse. You not only have to solve this hard problem, but you have to do it with no indication of whether you're succeeding. When you pick a big winner, you won't know it for two years.

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.

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's made harder by the fact that the best startup ideas seem at first like bad ideas.

The fact that the best ideas seem like bad ideas makes it even harder to recognize 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 probabili... See more

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 ... See more

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. You need to do what you know intellectually to be right, even though it feels wrong.

There's no correlation between the percentage of startups that raise money and the metric that does matter financially, whether that batch of startups contains a big winner or not.

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.

The two most important things to understand about startup investing, as a business, are (1) that effectively all the returns are concentrated in a few big winners, and (2) that the best ideas look initially like bad ideas.