Black Swan Farming

Paul Graham’s essay Black Swan Farming reveals how startup investment returns concentrate heavily in a tiny number of winners.

The Concentration of Returns

“Effectively all the returns are concentrated in a few big winners.” Dropbox and Airbnb alone accounted for roughly 75% of Y Combinator’s portfolio value. This creates extreme, counterintuitive variation—potentially 1000x differences in outcomes.

Unpromising Ideas as Opportunities

The best startup ideas initially appear flawed. “If a good idea were obviously good, someone else would already have done it.”

Peter Thiel’s Venn diagram captures this: the “sweet spot” lies where ideas “seem like a bad idea” yet “is a good idea.”

Facebook exemplified this—a site for college students wasting time seemed like a niche market with no revenue potential.

The Measurement Problem

Paradoxically, the easiest metric to track (post-Demo Day fundraising success) misleads investors. Graham reveals an inverse correlation exists: higher fundraising rates may indicate excessive conservatism.

The Psychological Challenge

Successfully navigating startup investing requires overriding intuition, similar to pilots ignoring physical sensations during instrument flight.

My Takeaway

The best opportunities look bad. Obvious opportunities aren’t opportunities at all.