Why Playing Poker Helped Me to Become A Better Startup Investor
Following the enormous MasterClass funding news last week and since Daniel Negreanu has made this great teaser video, it gave me an idea. For the past 10 years, I’ve been playing poker.. a lot. The thing I learned is that the same way poker is a game, life and investing in early-stage startups are also games. I mean from a strict gaming theory point of view: It involves an environment where players compete and fight for a defined goal, respecting a set of rules. I won’t explain why life is a game and how it relates to poker as well because I want to you read Olivier Emberton’s strategy guide for that. It’s one of the best articles I’ve ever read.
Instead, I want to unpack 5 mental models that I learned along the way and that I also found in venture capital last year. I hope this will be useful and fun.
Let’s go.
The expected value is the weighted-average value for a distribution of outcomes. Given possible outcomes, it’s basically, the sum of the different values associated with the outcomes multiplied by the probability of the outcome to happen. If the EV of possible decision A (the sum of all weighted outcomes related to decision A) is superior to those of decision B. Chose A. Decision making 101.
In Poker: EV is at the heart of every move. For instance, considering my hand and the cards on the already visible on the flop, should i call or fold? What should be my decision? What is the EV of Outcome A “a heart is shown on the flop” versus Outcome B “no heart is shown”? Well. Of course, if you think that a heart will give you the best hand then you should calculate the EV of those two outcomes before making a decision.
In VC: I can think of two ways EV is used.
In simple words, Pareto states that 80% of outcomes will come from 20% of the incomes. It follows a power law distribution.
In Poker:
That’s the reason the most important skills in poker are patience and learn to “rob value” by maximizing huge hands.
In VC:
That’s the reason VC seek for “go big or go home” startups. It’s the babe ruth effect. The EV of a power law distribution (VC returns) wants to chase unicorns because not only it will cover your actual losses but it will cover the future loses as well. That’s also why volume and diversification are key. It’s still better to make 200x — 1% of the time than 2x — 99% times… You need to win sure, but you need to win big.
Compound interest is basically reinvesting your gain resources to produce more outcome.
In Poker:
In VC:
Compound interest and network effects are the reason why I think VC both is a taught market with actually strong barriers to entry and why VC do become platforms.
VC is a taught market because even if it’s fragmented, there are actual home runners like Andreessen Horowitz, Sequoia and Benchmark in the US, Accel and Balderton in London, Idinvest in France. More money pouring into the VC industry doesn’t mean market efficiency for others.
I like to see it that way: Home runners have a track record of home runs. Track record leads to raising more funds and brand recognition for entrepreneurs. Money and brand recognition lead to better resources and to better home runner hunters in the fund’s team. This lead to both bigger networks and an actual incredible deal flow. Incredible deal flow leads to more frequent home runs with higher magnitudes. Loop is done.
You will tell me that’s why disruption exists. Wallmart had those network effects before Amazon came out. But VCs are in the business of investing in disruption. The only way to make a place is then to create a strong differentiator to make home runners go with you in the first place. Even if the market is inefficient and the information is partial, I don’t think there is room for more VCs out there…
Confirmation bias is when people are interpreting facts to confirm their actual’s opinion.
In Poker:
This tends to happen when you really don’t want to fold a hand because you’ve invested too much, you will start to search for an explanation about your opponents’ behavior that confirms you’re ahead.
In VC:
Don’t play the odds, play the man means to act in the reaction of your perception of the opponents and of your opponent’s perception of you instead of just facts.
In Poker:
That’s when bluff comes in.
In VC:
Play the founder. As I like to put it :
Founder > Market > Idea => A good founder in a good market with a bad idea is better than a good founder with a good idea in a bad market.
Even more :
Founder > Market + Idea => A good founder in a bad market with a bad idea is better than a regular founder in a good market with a good idea.
Ideas pivot, markets evolve but people stay the same even if they learn. It doesn’t necessarily mean the same thing in my case but I interpret it as I want :).
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Why Playing Poker Helped Me to Become A Better Startup Investor
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