How to turn a big idea into a billion-dollar company
What happens when you start a company that makes money?
What’s a billion dollar company?
The answer, of course, is you’ll make a lot of money.
But you might not make a billion dollars.
The answer is you might actually make millions of dollars.
That’s the conclusion of a paper by Princeton senior thesis candidate James T. O’Neill, Ph.
D. in finance, who was an economist at Bank of America and the Federal Reserve Bank of St. Louis at the time.
“The idea that a billion would make you a billion is not at all what you’d call accurate,” he says.
O”nly if you have the right mix of investors and you have enough money in the bank, you can turn a billion into a million.”
“That was one of the first papers that I ever did on the topic,” says O’Donnell.
In the 1980s, O’Neill was a visiting assistant professor of economics at New York University, and he was the first to suggest that a company could go from zero to $1 billion in a single year.
But the paper didn’t take off, partly because of O’Neal’s criticism of the methodology.
“That paper is kind of embarrassing to me because I thought it was very good,” O’Neil says.
“And then it turns out that it’s not so good at all.”
“It was just a bit of a fluke,” he adds.
“I think the problem is that when people are writing papers, they don’t think about the financial markets.
They don’t pay much attention to that.
They just think about economics, and economics is just a part of the financial world.”
“Economics is just part of what economists are doing.”
O’Leary and O’Malley’s paper was published in the May-June issue of the American Economic Review, but O’Brien says ONeil’s critique “didn’t take the paper seriously.”
“I was a bit shocked,” he recalls.
“He didn’t understand what I was saying.
And he wasn’t very articulate in his criticisms.”
O”neill was surprised by the criticism.
He said, ‘I know what I’m talking about.'”
“But he was very wrong.”
ONeal says that even if he thought the paper was wrong, “I had no idea that it would have such a big impact on financial markets.”
And he says he was surprised that O’neill’s critique did so much damage.
“When you read the critique, it’s like the paper is a giant rock falling from the sky,” ONeal explains.
“It’s like a rock is falling from a great height.”
The first problem with the paper ONeal points out is that ONeill’s analysis relied on a simple mathematical formula that, in the words of ONeil, “was written by somebody who doesn’t understand how the world works.”
In short, ONeal claims that OBrien’s mathematical approach is “a completely flawed way of thinking about the finance market.”
But ONeal adds that, despite this, the paper “has enormous impact on finance.”
The second problem with ONeal’s analysis is that it relies on a model called “the Monte Carlo method.”
In other words, the model uses a bunch of assumptions to try to predict how the market will respond to a company’s initial public offering.
The Monte Carlo technique is a mathematical technique, but the assumptions it uses are based on economics, not economics alone.
In other ways, ONeell says that the model can be considered more conservative than OBrien does.
“But the problem with using Monte Carlo to predict the market response is that the way that the Monte Carlo model works is that there’s no way to make it as good as the way you would have predicted if you didn’t do Monte Carlo.”
“There’s no reason to use Monte Carlo as the basis for forecasting the market reaction to a stock,” ONeild says.
That means that when a stock comes out of nowhere and is priced out of existence, “there’s no rational explanation that would explain why you would do it.”
And that’s not the only problem with this model.
“In my view, it is not a very good model,” ONeill says.
He argues that it fails to take into account “the possibility of the stock being a flop.”
“If you don’t have any kind of prior knowledge about how a stock will perform, there’s nothing you can do,” ONeil adds.
This makes sense, because “there are no market rules that tell you what will happen if a stock goes bust.”
The only way to “think about the market” in terms of economics is to look at the market through the eyes of a financial planner.
And ONeel points out that the financial planner in OBrien and ONeal doesn’t look at markets like markets are expected to behave.
“You have to have a pretty sophisticated understanding of the markets,” O Neil says. So, OBrien