I am surprised that investing, especially with Mr Altmans connections and experience, is still a 1/8 crap shoot and that's with no IPOs / exits. It indicates that the model we hold for what the world will look like in 5,10,20 years is far far from complete.
To keep it simple let's invest $100 in each of those 40 companies. He defines success as companies that have grown at least 100x over. We know 5 companies have hit that mark and know basically nothing about the other 35 that we'll just consider failures (even though they might only be 10x or 50x[a success in other areas for sure]).
Failed$ = ($100x)35 x is the multiplier on that money across all 35 companies. Perhaps he lost it all and it's 0, maybe it's slightly above 1, who knows. Regardless, in this totally mad eup case the total potential loss (ignoring potential to be invested elsewhere) is $3,500 or 87.5% of initial outlay.
The remainder using the simple information and interpretation available to us looks like this:
Success$ = ($100* 100) * 5 = $50,000
That is 12.5x the initial outlay of $4,000. Making 12.5x your outlay in presumably only a handful of years is massive. Obviously growth doesn't mean exactly 100X, but I just wanted to show that a handful of hits (and I think 5/40 is bigger than a handful) can easily pay for everything else and more.
Reread the article, this is only 2-3.5 years of duration. That seems insanely quick for these kinds of results.
They're perhaps not black swans in the sense that Sam is aware they may increase in value, but other than that they seem to match the criteria in a way that Powerball doesn't. Taleb has spoken specifically about how black swans are not lottery tickets because of this calculability.
Lottery is totally not black swan, which is exactly what I was trying to say. Despite having prior knowledge of the company's situation (unlike a completely random lottery), it seems to me that these investments are closer to the lottery than black swan.
You don't place bets on a specific black swan, but you could place a different, outside bet on a disrupting event (kind of the idea of antifragile, benefiting from disorder). I think under Taleb's comments in Antifragile, living life as an artist as opposed to someone who is inherently reliant on the stability of say, an office job, is placing that bet every day.
But you can't calculate the expectation value of startup investments. One outlier skews the whole sample, and there is no limit on how high.
Taleb explicitly placed startup investments as those that are antifragile.
It's more like when a small group of people split a large powerball jackpot
[A Black Swan is] more like when a small group of people split a large powerball jackpotAnother minor point: there's gotta be dozens of people playing the Lost numbers, the Miami heat starting lineup, etc... every time, so there are natural clusters of group splitting jackpots for lotto winners .
I would be amazed if someone could go 5/40 in predicting black swan events under their original definition.
Much like a group of investors investing in early stage companies.
Statistically, you can still define a finite expectation value for an unbounded probability distribution, just as you can compute a finite value for an infinite sum.
If you have a continuous analytic model, you can integrate that analytically (or for the various standard models, just look up the answer based on the parameterization). If you have a discrete analytic model (a step function), you can construct an infinite series. If you have a model based on discrete statistical samples and extrapolations thereof, you can use a combination of numeric integration/summing and model-based bounds.
So, even though the total possible return on a business venture is potentially unbounded, you can still establish a finite expectation value for it.
There's no public company with a valuation above $1 trillion, so there's an implied upper limit in practical terms.
The idea is orthogonal to seed round investing.
Black swan events are unpredictable and have enormous impact. Whether they're positive or negative is irrelevant. I'm reading the comments on this page and it seems many people are confused about the term. If you're interested in the connection to business and startups, check out this book: http://www.amazon.com/The-Black-Swan-Improbable-Robustness/d...
In the very first sentence of the book description, it defines a black swan event: "A black swan is an event, positive or negative, that is deemed improbable yet causes massive consequences."
It's used quite a bit to describe startup success. Paul Graham wrote about this in one of his essays as well. I think the term fits perfectly for this blog post.
Success rate is computed and regularly measured by VCs. Otherwise rule of thumbs like 7/2/1 (On average 7 startups will just fail outright, 2 might make your money back, 1 will make you a profit) wouldn't exist.
His rules:
1. The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).
3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.
http://en.wikipedia.org/wiki/Black_swan_theory
On a related note, Antifragile is a fun read. Taleb is extremely sure of himself, and extremely passionate. His books and ideas (culminating in Antifragile) can be pretty seductive in the moment.