False Positivity: Why We Believe the Unbelievable
Everybody Wants To Rule The World (but, statistically, you probably won’t)
You Aren’t Going to Play Pro Ball
With adventurous ventures and mission ambition,
While scheming and dreaming about our position
We pander, sans candor, discuss incorrectly,
The plausible pathways that chart our traject’ry
For MANGOS and FAANG bros1, their nascent potential
Began, with a growth curve beyond exponential
Let the images of childhood return. The brightly-colored classrooms with artwork thumbtacked to wall-hung particle boards. The cubbies and the plastic chairs. The animal crackers and juice boxes. It was against this backdrop that we were posed that perennial cliché of a question “what do you want to be when you grow up?”
Invariably, these answers contained the starry-eyed optimism of childhood dreamers. The answers contain the rarefied air of professional athletics, voyages through space, and the presidency. We would be fools to curtail such youthful exuberance.
We also recognize, as adults, that the probability that these dreams will be realized is minuscule.
This is why, though we would never discourage the lunchbox-toting youngster from dreams of Super Bowls and Olympic medals, we might be compelled to direct them towards viable fallbacks. Empirically, even in this AI-infused world, there are far more human beings paying their rent with spreadsheets and email than with their eye-hand coordination.
Yet, in so many ways, we remain dreamers, for better and worse.
For every would-be inspirational anecdote about Michael Jordan getting cut from his sophomore basketball team2, those who reach stratospheric heights typically display markers of excellence early and often. Which brings us back to that real-life company with those MS-Teams chats to which you must attend.
Here’s a table. These are a handful of companies every nascent startup imagines becoming. This is the “hockey-stick” trajectory over which VCs salivate.
| Company | Founding / Launch Year | Year 1 Revenue | Year 2 Revenue | Year 3 Revenue |
|---|---|---|---|---|
| Apple3 | 1977 | $774,000 (1977) | $7.8M (1978) | $47.9M (1979) |
| Amazon4 | 1995 | $511,000 (1995) | $15.75M (1996) | $147.8M (1997) |
| Netflix5 | 1998 (operations) | $1.3M (1998) | $5M (1999) | $35.89M (2000) |
| Meta (Facebook)6 | 2004 | $382,000 (2004) | $9M (2005) | $48M (2006) |
However, both intuition and empirical observation7 suggest that the path to the stars begins early. A firm, after a decade or two, may be a successful, profitable entity. But what it is almost assuredly not is a diamond in the financial rough, secretly harboring the potential for 100x or even 10x growth. Stagnation and/or slow growth is orders of magnitude more likely8.
VCs pay for the small probability of that right-tail outcome as children dream of the right-tail outcome of setting foot upon the finely-manicured grass of stadiums as the crowd cheers. While corporate boardrooms are filled with romanticized outlier examples (e.g. Tom Brady as a 6th-round draft pick, buried on the depth chart at the University of Michigan)9, potential is typically demonstrated early and often. If an improbable fantasy is deployed aspirationally, we would be cruel to throw cold water on dreams. We would rarely tell the average nine-year-old athlete to toss his baseball glove in the garbage.
But if one’s compensation, professional development, and general sanity are contingent upon such an improbable ascent, think twice. We would definitely tell the average sixteen-year-old that college admission is unlikely to arrive via athletic scholarship.
Don’t place a bet that time itself has already shown to be ill-considered.
You Aren’t Going to Hire Professional Athletes
The choice we make in the people we hire
Can impact the growth rates to which we aspire
When seeking potential, a whiff or a snoutful
You’re seeking an outcome whose likelihood’s doubt
And that means the talent you hold in your quiver
Must earn only X while 10X they deliver
Professional athletes are a vanishingly small subset of all human beings who partake in a given sport during childhood. Employees are, in their respective fields, rarely the domain-specific equivalent of a professional athlete. And yet, we aspire to hire these rarest of thoroughbreds.
In the previous section, we noted that a firm’s meteoric rise is likely to occur early in its life or not at all. Therefore, if we want to wager on the possibility of that most coveted of outcomes, we had better do so early, when the price of said investment is palatable. An analog lies in the process of hiring.
No, I am not inclined to argue that one must demonstrate their potential before they can vote or drink10. In fact, I might even be inclined to argue quite the opposite. In this case, the right-tail outcome when hiring is probably not hiring the Harvard-educated MBA, swallowing their substantial salary, then hoping that they deliver incrementally more than the already lofty expectations. The right-tail outcome is found when the non-traditional resume blossoms into a game-changing asset. The gifted technologist who has been inventing the future in his garage probably hasn’t also been mastering the bassoon and prepping for the composition-based components of standardized testing.
If the goal of an investment is massive upside, rather than minimizing downside risk, then the objective should be to place bets where the payoff has the potential to be extraordinary. If the goal of an investment is to maximize the probability of slow, steady growth, the behavior pattern is markedly different. It is not an accident that large, established, traditional firms hire the polished, well-coiffed holder of prestigious credentials while the unproven venture rolls the dice on the unestablished, non-traditional, and possibly, unkempt?
When you choose the name-brand asset, are you imagining there is still meat on the bone that the market has not already priced? Why do you believe a project that has been in-flight for several quarters will now demonstrate the trajectory-accelerating results it has not yet demonstrated?
Footnotes
Firstly, he was 5’11 at that age, and most 5’11 sophomores don’t become 6’6’’. Secondly, he was placed on the JV roster, as was standard procedure at his high school. He became a McDonald’s All-American well before he touched the hardwood at UNC.↩︎
As are disruption, destruction, etc.↩︎
Never mind the fact that even that level of athletic accomplishment (Division I, marquee conference, made the roster) is a right-tail event if ever there was!↩︎
That would seem highly likely to advantage those whose socioeconomic starting point led them to the appropriate set of experiences and credentials.↩︎