2021-07-09

Become a Billionaire Part II: You're Not Even Trying

Follow up to Life Advice: Become a Billionaire.

On Reddit, the comments are skeptical. Respondents suggest that perhaps there are more important things in life than money, and even if you do start a company, selling it for $10 million is better than risking it all for a chance at a billion dollar exit.

Which is funny, because those are precisely my reasons for optimism.

When you hear that the success rate for startups is low, or that very few founders succeed in hitting billion dollar valuations, remember that you’re including the entire population of people who, it turns out, actively don’t want to become billionaires in the first place.

What you should be asking is, what are the odds of becoming a billionaire, conditional on actually wanting to? Conditional on even trying? Conditional on not machine gunning yourself in the foot?

As it turns out, the mere willingness to not sell matters a lot. Here’s Peter Thiel:

The most important moment, in my mind, in the history of Facebook, occurred in July of 2006. The company had been around for 2 years, it was still just a college site. Maybe 8 or 9 million people on the site. The revenues were tracking to about 30 million, no profits. And we received an acquisition offer from Yahoo for a billion dollars.

…full disclosure, I think that both Breyer and myself thought that on balance we should take the money and run. But Zuckerberg started the meeting, and the first thing he said was “it’s kind of a formality, we have to have a quick board meeting, shouldn’t take more than 10 minutes. We’re obviously not going to sell”.

So sure, we can do the math, write out some probability distributions, factor in conditional risk. But here’s the bottom line: The more unreasonable it is to become a billionaire, the less competition there is, and the easier you should expect it to be.

This is perverse logic, and you could argue that it proves too much and could justify any bad decision. But it applies here anyway. It’s not that becoming a billionaire is actually irrational. It’s that people look at the failure rates, infer that it’s hard, that the rewards aren’t worth it, do some moral or hedonic calculus, and give up prematurely.

You could object that Reddit commenters are not the same population as YC founders, and this is all a tremendously unfair comparison. That’s possible. But I wouldn’t be too surprised if it turned out most people are just looking for an easy exit. After all, that’s the reasonable thing to do, isn’t it?

So stop complaining about the “risk of failure” when you’re not even trying to succeed.

This set of posts is not my most rigorous, but let’s run some numbers anyway.

Y Combinator reports a $400+ billion valuation for its top 100 companies, out of around 2000 it’s ever funded. So at first approximation, that’s $200 million in market cap per startup, or around $100 million per founder. But founders don’t retain all equity. What’s worse, dilution occurs as a function of rounds raised, so the bigger the pie, the less likely you are to own a large share of it. In practice, it’s not that bad. Stripe’s founders reportedly own around 23% of the company, and Airbnb’s founders collectively own somewhere around 40% of their company. That works out to 11.5% and 13% ownership per founder.

Still pretty good!

But remember again that we’re talking about a snapshot at a moment in time. Many of these companies are still growing rapidly. Using archive.org, I was able to go back and compile some data:

I also compiled data on the cumulatively number of startups funded. Taking a simple average gets us:

Again, it’s a power law, so even if the average is really high, the median outcome is probably $0. But if you’re a risk-neutral hits-based utilitarian minded person, that doesn’t matter. It’s pure expected value.

So stop complaining that it’s a poor bet. You have no idea how good it is, and it’s getting better every year.

Finally, let’s take a harder look at the happiness data.

I originally shared this chart from Matthew Killingsworth (2021):

On EA Forum, Julian Hazell and Michael Plant plot the data without the log scale and z-scores, and get a much more pessimistic interpretation:

With a linear scale, it’s easier to see how hard returns drop off.

…but wait a minute, they don’t just plateau harder, they actually dip down! Compare again to the original chart. This isn’t just a matter of axis-choice, it’s a bizarre discrepancy.

Rohin Shah asked the same question, prompting this response from Michael:

there was a discrepancy between the data provided for the paper and the graph in the paper itself. The graph plotted above used the data provided. I’m not sure what else to say without contacting the journal itself.

Kieran Healy noticed the same problem and produced a similar plot:

As the original paper explains:

Mean levels of experienced well-being (real-time feeling reports on a good–bad continuum) and evaluative well-being (overall life satisfaction) for each income band. Income axis is log transformed. Figure includes only data from people who completed both measures.

Healy is unsure, but offers the following explanation:

The z-score means in the replication package are, presumably, calculated from all the observations for each measure. But if the figure is showing a subset of the two (i.e. only observations from people who answered both questions) then the z-score means across income levels will be slightly different, depending on who is excluded… That might well be just measurement error, given the vagaries of income reporting and small-n noisiness at very high incomes, but it would directly cut against the main claim of the paper.

To summarize:

It’s unclear what’s actually happening in the original paper
It’s possible z-scores are being calculated at each income band amongst different subpopulations
This creates two separate interpretations (“wellbeing continues to increase, just more slowly”, “wellbeing caps out at $400k”) depending on which methodology you choose
In either case, Life Satisfaction continues to increase with income

This mirrors the Kahneman and Deaton (2010) finding that measures of wellbeing plateau, but measures of life satisfaction do not.

The supplement to Killingsworth (2021) provides some additional useful context, including an interesting section titled “why the current results might differ from past results showing a plateau in experienced well-being”:

Examining Figure 1 in the 2010 paper finding a plateau (3) shows that positive feelings (“positive affect”) appeared to have been at the response ceiling in slightly more than 70% of responses at the lowest income level, and around 87-88% of responses at upper income levels. Accordingly, the vast majority of participants in that study were indicating the highest possible level of positive feelings the scale allowed at incomes of $75,000, limiting the ability to detect further improvements in people with incomes above $75,00

You could counter-argue that this is not a statistical ceiling effect. People just genuinely have the best lives possible. I firmly disagree. As noted earlier:

The Cantril Ladder depends upon the capacity to imagine a better possible life. At the moment, it is difficult to conceive of a world in which diseases are eradicated, although such a world would make us much happier. Conversely, we can imagine someone from the distant past reporting “I’ve lost two children to disease, lost my wife to childbirth, lost half my friends to war, but the harvest is good and we have a good chance of surviving the winter months, so maybe a 7/10”. We should not take this as strong evidence that their life is nearly as good as possible.

We still have disease, we’re still superstitious and ignorant, still caught up in tribal violence.

So you don’t want to be a billionaire. Fine. But just stop fetishing poverty. Stop acting like you can shield yourself from moral corruption of the market so long as you achieve the right work-life balance. If you’re going to pretend to be anti-capitalist, at least quit your day job and do something with your life.