From Wikipedia, the free encyclopedia
Hasty generalization, also known as “fallacy of insufficient statistics”, “fallacy of insufficient sample”, “fallacy of the lonely fact”, “leaping to a conclusion”, “hasty induction”, “law of small numbers” or “secundum quid”, is the logical fallacy of reaching an inductive generalization based on too little evidence.
Examples with contradictions
“I loved the hit song, therefore I’ll love the album it’s on”: Fallacious because the album might have one good song and lots of filler.
“This Web site looks OK to me on my computer; therefore, it will look OK on your computer, too”: Fallacious because many computers present content differently.
So why did I post this seemingly random snippet from Wikipedia?
This comment was made in an earlier post, and i thought it deserved to be highlighted as a separate posting:
That’s why over ninety percent of such startups fail. And that just doesn’t apply to alt.space or dot.com. In the early 80s, it was personal computers. Anyone remember the Osbourn?
Of course even knowing how to run a business is no guaruntee of success. Andy Beal is a great banker. His launch company failed when the market collapsed on the late 90s.
In the great scheme of things it doesn’t matter. The five or so percent of alt.space companies that succeed will change the course of history.
So here is the issue i have with statements like this – it is the same fallacy that many VCs (and everyday investors who followed the investments of those VCs) made during the dot com bubble.
In the traditional VC world (you know, the guys who were around in the 70s and 80s, long before it was “hip” to be a VC and all you needed was an MBA from the right east coast school…), the venture capitalist was someone who had built and run one or more successful businesses, made a decent pile of money, and was looking to help the next generation of entrepreneurs build more great businesses.
These “Old School VCs” (OSVCs) would do incredible due diligence in the process of deciding whom to invest in – it was about more than JUST the business, it was about the management, too. But good management and a BS market was still BS. This due diligence was NOT, unlike today’s New School VC (NSVCs) model, about waiting until another VC came in and then jumping in too, pretending to do proper analysis while blindly chucking in millions of dollars into a venture because “Benchmark Capital” or (insert big name VC here) had already agreed to invest.
THIS IS NOT DUE DILIGENCE, FOLKS.
It’s betting that someone ELSE has done the homework, and just copying their answers.
So, back to the OSVCs. What they found, over time, was that if they were to invest in 20 companies, ALL of which had been grilled through the harsh cold logic of the OSVC due diligence machine, the performance would be something sort of like this:
- 10 failed
- 6 muddled along
- 2-3 did ok
- 1-2 were home runs
So out of 20 seemingly sound investments, 5-10% actually became winners. The rest were dead, walking dead, or just poor performers.
This statistic was regularly abused by the NSVCs (and still is) – in that they first deluded themselves, and then the larger investment community (including individual shareholders) that they actually understood how this model works.
It’s not enough to just make 20 investments. you have to make 20 SOUND investments, and even then you can only hope to get a 5-10% hit rate. But if you invest in stupid businesses like pets.com and 19 similar ventures that show a fundamental inability to grasp what the WWW actually was (a distribution channel, not a manna from heaven), then you are likely to have a 0% success rate. 20 bad bets won’t get you the distribution of wins/losses that 20 good investments will.
So, in the alt.space context – in isn’t simply enough that there are lots of startup companies out there all seeking funding. There have to be lots of OSVC-ready companies – and even then, if we’re lucky, 5% of them will be successes.
My other little quibble with the comment from above that i used to start this blog is regarding Andy Beal. His rocket company didn’t fail because the market collapsed in the late 90s. That “market” was a paper one, based on fictitious satellites that would never see the light of day and the VAST majority of which were never funded. Building a rocket company on the late 90s launch industry market forecasts for satellite demand was a recipe for failure. As he found.