The Fascinating Problem Of Prediction

A few years ago, I built and sold a company based on predicting volatility in capital markets. 

Before that, I was fascinated by mathematician Benoit Mandelbrot's study of markets. He concluded, "The whole edifice of modern financial theory is founded on a few simplifying assumptions."

Mandelbrot discovered that market price fluctuations are hair-raising-far more significant and more damaging than most understand. He used statistical physics as the basis of prediction with a high degree of success.

The Unexpected

Predicting price swings, volatility, or even sentiment for exchange-traded assets is challenging but possible. The problem comes when the unexpected occurs. Mandelbrot found that the "unexpected" happens far more frequently than expected.

Private markets

Public companies have a level of liquidity that makes it easier to predict future performance. In contrast, private companies are black boxes. For example, predicting whether a former product manager, social scientist, and sales pro will have success in a new company is impossible.

People

The complexity of markets and the impossible nature of private company investing come down to people's irrational nature. Even those who guide early-stage companies argue over the most essential traits for success. Add to that something unexpected will occur during the company's lifespan, and prediction is impossible.

Clues

As I look at pitch decks and meet with founders, it becomes clear who should have a second meeting. This is straightforward: Answer whether they have done the research, whether the product is selling, and whether they present better than average. However, this in no way predicts a meaningful exit.

Hope

Many previous founders and seasoned investors rely upon models built on the success of past companies. I, too, have studied many of these companies and discovered that one factor stands above the rest. That is, the founding team's ability to solve problems quickly, coupled with their ability to replicate themselves as the company grows, is most critical.

Conclusion

I have failed twice and succeeded twice in building startup companies. The difference between my success and failure comes down to the team. If I was at my best and around others with similar drive, then we would grow. However, if just one founder cannot perform, everything becomes an uphill battle.