> The math does not support this strategy but if other investors want to try it that’s fine.

I think Jasper and Paul are talking past each other here. The math doesn't support the strategy of small exits if you are an investor in a large fund. If you are an individual starting a company, though, I've seen a lot of math that says you have a much better chance at success if you swing for a "$20 million niche" than a $10 billion company.

Does it really make financial sense though? If there are two founders, some outside equity and a few employees I'm not sure $20 million is better than working in a big company and the risk is surely larger. It might be a lot more fun though, and you will learn a lot so if they payoff is comparable I would say go for the startup if you can afford it.

$20 million is $5 million if you just own 25%. thats almost 40 years of working at a dayjob.

Except after taxes and expenses you're lucky if you're saving $1000/month at that day job. After 40 years, assuming 5% annual compounding on your investment, which requires to be almost entirely in risky investments like stocks, you could end up with 1.5 million. On the other hand, 3 million after taxes out of the initial windfall of 5 million, at 5% return would let you pay the exact same expenses while still growing by over $5000/month. You'd end up with $30 million at the end of 40 years. Huge difference.

Your numbers are way off.

In the US a young, single developer who follows a budget should be able to save at least $2k/month.

$80k/year income less 25% for payroll & income taxes leaves $60k/year. $1.5k/month in housing & $1.5k/month in food/utilities/cell phone/clothes/etc. is $36k/year in spending, leaving $24k for savings. (This also ignores the tax advantages of retirement accounts, which allow for more room to save or spend)

The average nominal returns of the stock market are over 10% per year: a very simple & conservative investment portfolio of 60% S&P 500 index fund & 40% US Treasury bonds yields about 8.7%/year. If we assume 2.7% inflation we get 6% real return/year.

add a few kids and you'll end up with debt instead of savings...

FWIW, a founder with an 83b election will almost certainly be paying the long term capital gains rate on their $5m: 15% federal.

(add another 13% if California though)

wait, why 13% if California?

But if targeting a small exit doesn't allow for investors that means individuals trying for small exits won't find investment.

"suggests individual entrepreneurs have a much higher likelihood of success when they raise less capital

Maybe angels?

Angels are often as not more headaches than their money is worth. You get almost all of the downsides of having investors and none of the upsides.

Angel investments can make sense but usually only if you know you will be going for a larger round later.

  >> When you sell too early you don’t realize the full potential.

For every company you can find that sold too early, I can probably find 10 companies that had a good chance to sell that they should have taken.

The company that sold too early probably lost out on more than the ten companies that should have been sold, combined.

But how do you know? I know on hindsight a lot of companies that peaked about the time of their offer. Soon after the investors realized that the potential market wasn't as big as hoped and they pull. (some of the companies still exist, they serve their niche well which makes for some profit and keeps a few people on the payroll)

General economic principles? There's typically a risk premium for things. If a company is worth a billion dollars 10% of the time and nothing the rest, it's fair market value is typically under $100M.

That, and there's a power law distribution of start-up results. The majority of returns come from the minority of companies that end up doing really well.

That isn't the question I meant to ask. What I mean is say you have a company and get an lower offer now. Should you take it? (assume that maximizing money is your goal) If the company is at the peak of course you should, it isn't the big offer you hoped for, but it is the best you can ever get.

There are a lot of startups that fail. Then there are a fair number that do okay, but never really get big. Then there are a tiny number that gets big.

It's interesting to contrast this with the PG era of YCombinator:

http://www.paulgraham.com/swan.html#f1n

[1] I'm not saying that the big winners are all that matters, just that they're all that matters financially for investors. Since we're not doing YC mainly for financial reasons, the big winners aren't all that matters to us. We're delighted to have funded Reddit, for example. Even though we made comparatively little from it, Reddit has had a big effect on the world, and it introduced us to Steve Huffman and Alexis Ohanian, both of whom have become good friends.

Nor do we push founders to try to become one of the big winners if they don't want to. We didn't "swing for the fences" in our own startup (Viaweb, which was acquired for $50 million), and it would feel pretty bogus to press founders to do something we didn't do. Our rule is that it's up to the founders. Some want to take over the world, and some just want that first few million. But we invest in so many companies that we don't have to sweat any one outcome. In fact, we don't have to sweat whether startups have exits at all. The biggest exits are the only ones that matter financially, and those are guaranteed in the sense that if a company becomes big enough, a market for its shares will inevitably arise. Since the remaining outcomes don't have a significant effect on returns, it's cool with us if the founders want to sell early for a small amount, or grow slowly and never sell (i.e. become a so-called lifestyle business), or even shut the company down. We're sometimes disappointed when a startup we had high hopes for doesn't do well, but this disappointment is mostly the ordinary variety that anyone feels when that happens.

"Sam Altman has said that the only criterion Y Combinator uses to evaluate applying companies is, “Can this be a $10 billion plus company?” like Airbnb and Dropbox. "

I would have thought there would be no way to predict this when looking at the initial barebones product from a few hackers building something that barely works.

If Sam can do this consistently he is a genius. Except maybe Amazon, I can't think of a single company I would have identified as "having the potential to grow into a 10 billion dollar company" in its initial form. :-(

Potential is defined pretty loosely as "1/200 chance of being worth 10 bil plus" based on their track record so far.

You might be able to do that if you had enough amazing people / companies offering you equity.

I think what he's saying is that there are a subset of companies that no matter how successful they get, they are not in a market to ever be worth 10 billion.

It's odd that there's no pushback on that statement versus reality. Does he really think that some of these developer tools startups, sous vide cookers, or glass of wine in the mail every month type companies are headed to eleven figure valuations?

I think the answer to that is yes, in terms of potential. The global wine market from just the quickest Google search seems to be north of $300B. The cooking appliances market is massive as well.

Sure and the global food market is even bigger, but that doesn't make me want to fund a hot dog cart.

I mean they literally funded a company that opens bottles of wine and sells it by the glass through the mail.

It's hard to reconcile that behavior with his stated investment approach is all I am saying.

How about a robot hot dog cart you just drop off and it makes people's dogs?

Stealing - locks, cameras, alarms.

But, every niche is part of a bigger market.

The problem is the focus on exit. Entrepreneurs can live quite well on seven to eight figure businesses, provided they enjoy the work they do.

IMHO The real meaning of the question "Does the market support a $10Bn company?"

If an idea is very niche like "Maserati custom accessories sold online" then that isn't likely to grow to $10Bn+ company or have any major impact.

But let's say hypothetically to took that company and say it does a million year and throws off 300k could you hire a small team to say do more parts. Then maybe a whole custom bike. then a mass produced bike. then autonomous bike. which to me seems like a better path than Elon Musk's payments to high cars, to roofs, to space etc.

well that is basically my business model, :) . I don't feel like chasing money around, so I fund my own silly ideas. Sooner or later one idea/product will pay off (or not). I am trying to enjoy myself in the process. In the meantime we are adding equipment to the factory, and adding customers to our distribution network

I wish I could up vote this several times.

I feel like a nice interactive JS widget letting you play around with portfolio variables (duration, %win, company size distribution, etc) would dissuade so many fledgling company founders.