Friday, October 14, 2011

Investing at Random

One of my criticisms of the efficient market hypothesis is that, in practice (e.g index funds), it means buying companies at random without any thought, judgment, or diligence.

And, I thought, would any one ever invest in private companies this way - at random? Just throw money at them on the assumption that someone else had done the hard work of pricing them properly? Obviously not...

There is a seed stage venture capital firm called Y Combinator, run by Paul Graham whose essays on startups are excellent. The actual startups that they fund are silly Web 2.0 concepts that I wouldn't touch with a 10 foot pole, but he is a pretty decent judge of talent, has a low acceptance ratio, and because he is the first capital in he is getting valuations under half a million.

Earlier this year, Yuri Milner announced that he would invest in every startup that was funded by Y Combinator, blind, on extremely generous terms: $150,000 in convertible debt with no cap and no discount.

You could write that off as just one crazy Russian, but now VC firm Andreessen Horowitz is joining in and will contribute $50,000 of that $150,000.

Who would have thought that a decade after the dotcom crash, people would be making these kind of bets. That's social mood for you.


Unknown said...

Totally amazing right? The best part is then they crown themselves experts and everyone buys it. Like a grownup version of pretend time. Even if they lose money, Peter Thiel, people still give them more money for funds!

CP said...

This web 2.0 stuff is going to be such a wipeout. Maybe 2012?

CP said...