OH “Only $15 million? Forget it then, I’ll pass.”
OH “Only $15 million? Forget it then, I’ll pass.”
Inside scoop overheard at the TechCrunch 50 conference this week? Nope, but that would be a great story. I actually heard this while standing in line last week at a neighborhood bodega. It was a hot day and there was a line of folks patiently waiting to pay for cold drinks. Meanwhile, the man in front of me had nothing in his hands. He patiently waited to reach the register where the clerk asked him what he wanted. The man simply asked how much the California lottery was due to pay out that night. “$15 million” was the disappointing answer. “Only $15 million? Forget it then, I’ll pass,” and out the door he walked. Predictably irrational.
For a week, I’ve been replaying the this interaction over and over again in my mind. Only when I replay it, I stop Lottery Man before he leaves the bodega. In my imagination, I remind him that the odds on winning the lottery don’t change with the size of the payday. If you play, you are as likely to take home a $5 million payday as you are to take home the $165 million payday. And then I ask him, how much is enough? If a possible 15,000,000X return on his $1 ticket wasn’t enough to tempt him, would a 20,000,000X return have done the trick? Was 45,000,000X was the magic multiple?
My daydream hasn’t yet progressed to the point where Lottery Man utters a response – all I can see is a quizzical stare. But I take his point. It’s time to go big.
While 15,000,000X wasn’ enough to tempt Lottery Man, early-stage investors dream of comparatively modest 10X returns. Most of us would probably be thrilled with 3X multples on our portfolios. But looking to the year ahead, it’s time to follow Lottery Man’s lead. Enough with incrementalism and features disguised as companies. If you have a monster of an idea, let’s talk. No formal team, no pitch, no demo needed. Just a big, world changing idea. Let’s think big.
When the guy responds in your daydream, he should tell you that he has calculated the aggregate probability of winning the lottery over time and different jackpots. And he’s figured out that if he only plays when the prize is above a certain threshold, then the wisdom of his “investment” is greatly improved.
To which you should reply that it’s the lottery, not “Deal or No Deal,” and the probability of winning isn’t fixed. In fact, since it’s inversely proportional to the number of people who buy tickets, which is in turn driven by the size of the jackpot, higher payouts have actually have worse odds.
Oh wait, were you using the whole Lottery Man thing as a…what do you call those things…metaphor?
jonathan
September 10, 2008 at 9:10 am
Jonathan, the odds of winning are not dependent on the number of participants. Only the pot split is dependent.
kent
September 10, 2008 at 1:28 pm
The issue is that the expected value of the ticket changes with the size of the jackpot. As the jackpot gets bigger the expected value increases. Where expected value = probability of winning the jackpot x Size of jackpot. But you are right in that you have to account for the pot split as well.
Chris
September 11, 2008 at 7:45 am
Hey Kent, next time you’re at that Bodega, would you grab me a lottery ticket
?
Robi Ganguly
September 12, 2008 at 4:23 pm
Kent,
The SV echochamber is systematically stamping out the big ideas…it seems as if the expectation is an M&A exit, therefore there seems to be less focus on building unique companies that are worthy of an IPO.
Even if you have a big idea (I’m building “Expedia” for health services to bring retail purchasing to healthcare, as we see the health insurance market follow the path that pensions took to 401(K) and insurance becoming increasingly unaffordable) the process teaches you to disguise it as a small one, as investors look to stick to what they know or wait to see initial traction packaged nicely into a niche play with a logical acquirer in a discrete tech-focused vertical(disruptive ideas don’t fit so nicely into established silos…per Clay Christensen the best v1s are small, crappy, and differentiated along an access that hasn’t historically mattered in that field).
The focus on established teams with existing connections to the Valley further reinforces the likelihood that you’ll see v2 of an industry insight or technology.
The most likely teams to generate the really big wins are the unproven founders working on the edge of an emerging, but unproven market with lots of dry powder. In this climate, where people are fleeing to safe, low yield options or battening down the hatches are there investors looking to swing for the fences in high risk, high upside opportunity with an unpredictable team?
The implications are that ideas/insights again matter more than track records and that degree of pain matters more than existing registered users for a vitamin product. Are you truly looking for that in an early stage company?
Vijay Goel, M.D.
September 17, 2008 at 10:17 am
Okay! I admit it. I only buy lottery tickets when the jackpot is more than $80 million. My reason is routed in behavioral economics.
Lottery tickets are either an idiot tax or a chance to dream.
Damn it, I want to dream BIG!!! …set up a charitable foundation …fund socially responsible start-ups like Mint, Tesla, Kiva, DonorsChoose and Tripit.
Also, I only buy 1 ticket no matter how big the jackpot becomes. Subsequent tickets are all idiot tax. You don’t need them to dream.
Finally, I am NOT the guy from the Bodega.
Sean Brady
October 21, 2008 at 3:44 pm
… I buy my lottery ticket at Lucky in Millbrae.
Sean Brady
October 21, 2008 at 3:46 pm