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Comment by mixmax | Hacker News Reader

Investments in innovation are very risky, but the payoffs match the risk. Basically as an investor you need to understand this and to decide how much risk you're willing to take. If you invest in a proven technology and a proven team you're more likely to make a smaller profit, but investments in new technology and often unproved teams can provide obscene paybacks but carry considerably more risk. Google comes to mind as an example.

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I don't think it's that simple. First of all, risk cannot be measured, so the fact that a person takes as much risk as they can bear is incorrect, it's all an illusion. I think it's easy to look back at let's say, Facebook, and say that they were a risky bet with a huge potential for growth. But the fact is that this kind of disruption cannot be predicted, in other words, no one in their right mind would have predicted Facebook to grow this big.

What I am trying to say, is that there is no point on investing in a company simply because they are risky/unpredictable and hope that they happen to be at the upper end of the tail and give back huge returns-- that would be a terrible strategy.

Facebook is a great example of a very risky bet that paid off bigtime. As you say, noone in their right mind would have predicted that facebook would grow this big - but the VC's that did and took a huge risk got an enormous paycheck out of it. The same Vc's probably invested in a lot of other companies that turned out to be losses.

Basically my premise is that risk x potential payout is a fixed number. Invest in a McDonalds franchise on your local highstreet and you will have a high probability of a low return. Invest in crazy stuff like facebook abd you have a low probability of a high return.

As you say, it's a simplicfication but I think it holds true in general.

Oh please, facebook already had 1/2 the Ivy league signed up and were growing at a fantastic exponential rate before they received an initial investment of 500k in June of 04. A real 'venture' move would have been to fund Zuckerberg _before_ he had a giant user base.

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