A short YouTube monologue in which Sam Altman describes his two main early mistakes as a startup investor: (1) caring too much about what other investors thought, and (2) not understanding the Power Law—i.e., that angel investing is driven by a small number of outsized 'home runs' rather than many small wins. He advises evaluating startups by their potential upside first (How big could this be?) and warns that thinking about possible failures first filters out companies that could become massive.
Chapters
The number one mistake that I used to make when I started investing was actually not a misunderstanding of the power Law. The number one mistake was that I cared too much about what other investors thought. And the sooner you can free yourself of this, the better. I think this is a very common mistake that people make when they start investing. You get very swayed by what previously successful investors think. The first question that most people ask YC startups is who else is investing in your round? I would say 80% of investors outsource 80% of their decision making to what other people think about an investment opportunity. But the problem is everyone does that. And so there's this weird schooling effect where a company gets hot for no discernible reason or it fits a trend or whatever, and then everybody wants to invest in one company and it's just because a few people decided they liked it. So the number one mistake I made was to be too swayed by what other investors thought, good and bad about a company. After I corrected for that, the second biggest mistake I made was not understanding the Power Law. The power law means that your single best investment will be worth more to you in return than all of the rest of your investments put together. Your second best will be better than three through infinity put together. And this is like a deeply true thing that most investors find, and this is so counterintuitive that it means almost everyone invests the wrong way. The question that most people think about when they start angel investing is, can I hit a bunch of singles? And in most other kinds of investing, that's the right way to do it. You know, if you're going to invest in stocks or bonds or whatever, that's how you do it. You just compound singles for a long time. But angel investing is a business of home runs, and you want to look for things that can be potential home runs. This is, I think, the most important thing to learn and the thing that most investors get wrong. It's all about the magnitude of your biggest success. It is not about the failure rate. Most investors talk about their failure rate. You can have 95% of your investments fail if one of them returns a billion dollars and you'll be totally happy. And so this is what you want to think about. The first question that I try to ask myself when I meet a startup is not why is it going to fail? It's not what could go wrong. The first question is, how big could this be? If it works, can I imagine this founder, this idea, this market, supporting a massive, massive company? And then I think about all the things that could go wrong. But I found that if I thought about what could go wrong first, I filtered out the companies that could be giant. The companies that could be giant are at this intersection of sounds like a bad idea is a good idea. And because that's a very narrow intersection, and because they sound like a bad idea, the best investments are the ones that are easiest to talk yourself out of. If you start off thinking about why they could go wrong.
