How startups are like professional poker

Robbert van Geldrop
on
July 30, 2018

The startup has become a commodity as the cost of running a business has decreased tremendously and the available knowledge and tools for it have become widespread. You can already tell by the number of unicorns — startups with a valuation of more than 1 billion dollars — according to CBinsights.

It has become way easier to start a startup, because the rules have been written down — check out Y-Combinator’s Startup Class videos — so now other skills become more important to succeed.

At the same time, since more people are taking a shot at this, the luck factor seems to be more prominent than ever. What makes it that some startups go to multi-billion euro valuations in a few years, while others fail miserably? Is it sheer luck?

Let’s use the analogy of professional poker to get my point across. Interestingly, in professional poker, the luck factor is always there, but somehow the best poker players perform consistently well.

Knowing your odds

Just as in poker, you can play many games yet the odds at winning depend on the hands you draw and how these stack up in general. Drawing pocket kings or suited connectors is far more interesting then drawing a 2 and a 10 from different suit. The same is true in startup life, but this is about what you’re good at and how an idea you might have fits your own expertise, your network and the team you can gather around you.

Many first-time founders don’t consider why they are the right ones to pursuit a certain vision. This is caused by the romanticized version we see of other young founders who have happened to stumble upon an idea and who happen to build something like… Facebook…?

Mark Zuckerberg is an outlier. Most successful companies are built by people who know what they are doing due to their personal experience. Even in the narrative of ‘just a bunch of students who built a massive company from scratch’ you’ll find these unlikely attitudes towards markets and industries based on domain expertise and a strong vision accompanying that. Back when Facebook got founded, only a handful of people were into building social networks and there were effectively no real experts, just people with a very explorative mindset and bunch of first principles which turned out to be right.

Knowing when to fold

This is one of the most underestimated skills in professional poker. You might have a great hand and a shot at winning, but another player might beat you and takes it all. Realizing you’re at odds of having a second-best hand is important.

Knowing when to fold is much harder when you’re trying to build a company, but there are strong tells that you should listen to. Here are a few:

  • You have no customers and have no idea how to get them.
  • You have some customers, but they don’t pay you enough to enable you to grow the company or they pay you for something you don’t think relates to your core vision.
  • Your team is not able to execute on the idea and you have no clear outlook on expanding the team with the missing skills. People are in fact leaving your company.
  • You don’t have a passion for what you’re doing. The business has evolved into something you don’t like and the perspective of it becoming interesting again is not within sight.

Your biggest risk takes shape in the form of a big opportunity cost which wastes your talent and experience. The problem with this is that it’s not experienced by entrepreneurs as a pain and therefore is a silent killer. Time is a far more precious resource to you then the idea you’ve come up with.

Maximize the winnings

This is the opposite of knowing when to fold. In poker there are two ways to maximize the winnings:

  • Extracting more money from your opponents as you know you already have the winning hand. This requires you not to signal too much confidence as that will cause others to fold.
  • Go all-in if you know it’s a matter of luck and a few other opponents might have a potentially winning hand as well.

In your startup this translates to not selling out too early. This goes for when you take investments, how you take investments and when to start selling the company. If your company is doing very well — particularly when it comes to signing up new customers and having a good sight at profitability at scale — postponing an investment might help you pick investors and generate exit opportunities far beyond what you initially envisioned.

This means that you have to figure out which customers are your ideal customers and fine-tuning your business at a small scale before you set your company up for growth. This is always somewhat counterintuitive to what entrepreneurs think they should do. It’s very tempting to scale up your marketing and sales efforts sooner than later. Yet, in my experience it’s harder to learn what value you’re providing to your customers exactly if you’re scaling up your outreach to the entire market. As long as you’re not sure, don’t go all in. Keep tinkering at a smaller scale.

This is also true for intrapreneurs in large companies. It is often better to get the new product or service a mature state as a separate team or entity before handing over the new business to internal operations.

Once you’ve got a clear shot at dominating a niche market it would be time to go all-in. This is the situation venture capitalists really like. Their money becomes fuel for a business which can grow fast and has a running engine for it. If the niche market can be the starting point of a large market it can mean that the company can grow really big and really fast.

If you look at what successful startups say when you ask them about their success, they often point to luck and timing. However, you do have to get everything else right and if you do, luck and timing will amplify your success. If you’re going to run with an idea that doesn’t suit you and a team that does not have the right skills, connections and ambition levels, you’re not going to be able to leverage the luck and timing that might come around at all.