What I Learned About Entrepreneurship From Watching the World Series of Poker
I can't play poker, but I do enjoy watching it on TV. We're in the middle of the 2009 World Series of Poker, an event that draws thousands of professional and amateur players to Las Vegas every year. The grand finale is the Main Event, a massive Texas Hold 'Em tournament with thousands of players and millions of dollars for the winner.
Tournament poker used to be the province of professionals. But starting a few years ago, a huge wave of amateurs has invaded the game. As a result, of the thousands of entrants into the Main Event, only a few hundred are real pros.
To my surprise, I've actually learned a lot about entrepreneurship from watching the World Series of Poker. But it shouldn't be too surprising. Both rely on acting strategically under conditions of extreme uncertainty. And, in both, small changes in your odds of winning can have a big impact on the final outcome. In fact, I now routinely use the Main Event to help entrepreneurs cope with a frustrating paradox.
Why are some terrible entrepreneurs so successful?
Because the structural barriers to creating a high-tech startup have been lowered dramatically in the past few years, we're experiencing a huge influx of entrepreneurs. This is a great thing. But it's meant that there are an awful lot of startup stories floating around. When those stories take on the status of myths, they create tremendous confusion. Naturally, we want to emulate those that have been successful. But that's not always a good idea.
In the World Series of Poker, no professional has won the Main Event in seven years. When you think about it, this is very surprising. Professional players are so much better than amateurs that they can make a living – in many cases, becoming very very rich – by exploiting the difference between their level of skill and the level of the people they play with. The best of the best win many tournaments each year. By any objective measure, they are much better players than the amateurs. Yet the Main Event has been won year in and year out by a complete unknown player. Some of those amateurs go on to become semi-pro players. But most have never won another tournament after their big win. Why?
The reason is that being a professional player shifts the odds of winning a given poker hand in the professional's favor, just a little bit. Over the course of a year, a given pro will play thousands of poker hands, and so this shift in probabilities adds up to dramatic winnings. But on any given hand, they still have a significant probability of losing — even if their play is perfect.
Similarly, given enough amateurs in the field, the law of large numbers means that at least some of them will get lucky enough times to outperform even the best pros. That's why I can say with some certainty that an amateur will win the Main Event this year, even though I have absolutely no idea which of the six thousand entrants it will be.
Entrepreneurship is similar. So much of what makes a startup successful is totally out of our control: the timing of the market, the behavior of competitors, the IPO or M&A window, underlying technology trends and, of course, the human factors of investors, co-founders and employees. Truly successful startup methodologies like customer development or the lean startup can only hope to increase our odds of success — they can't guarantee it. The converse is also true: even entrepreneurs who do everything wrong sometimes get lucky and make a lot of money anyway. Some even do it repeatedly.
That's why, for any tactic or strategy — no matter how hare-brained — you can find some "proof" that it works in some company somewhere. That's what makes processing startup advice so hard. Just because someone has had a success doesn't necessarily mean they understand why they were successful at all.
Which brings me to the second thing I've learned from the WSOP. It's called a disciplined laydown. In poker, winning requires that your hand beats your opponents hand. The problem is that you don't know what your opponent has. Amateur players often believe that their success depends on the quality of the cards they are dealt. Consequently, they fold their bad cards and wait for that one big hand to get their chips in with. Unfortunately, having a big hand doesn't mean you'll win — your opponent could have an even bigger hand. That's why the most important skill in poker is not bluffing, counting cards, or computing the odds. It's figuring out when you need to fold a big, big hand. Watching the pros do this on TV is amazing. Over time, they develop an uncanny instinct for knowing when they are beat, and not throwing more money after bad.
In fact, once you realize that this is the most important skill in poker, it becomes clear that when professional players bet, they are really probing for information. Everything is calculated to help them figure out if their opponent has one of those big hands that might beat them. Folding in those situations saves chips that can be used more profitably later in the tournament.
I think there's some wisdom here for entrepreneurs, too. We get attached to our big ideas, but it's those big visions that get us into trouble. Just because we've sunk a lot of time and energy into an idea doesn't necessarily mean it's a good one. In fact, the main reason we need to get out of the building and validate our ideas is so that we can realize we're beat before it's too late and pivot. Once you have that insight, you realize that all of the work we're doing in building an initial idea — from minimum viable product to split-testing to customer validation — is all designed, like the bets of a poker pro, to promote learning about where we stand.
And that provides another possibility for dealing with startup advice. Instead of making an exhaustive search for all the smartest, most successful people and copying them — learn to place small bets. Take any advice (including mine), and think it through for yourself. Do you understand the underlying principles? Can you see how it applies to your specific context? Can you tease apart the impact of luck? And, once you think you have some advice you might like to follow, try it out. Find a way to pilot it without betting your whole company. And then be prepared to fold if it's not working. Each time, make sure you do a root cause analysis, and figure out what you learned.
And, if you find advice that seems to work, be ready to go all-in.
Eric Ries is a serial entrepreneur and author of the blog Startup Lessons Learned.
Image courtesy Flickr user banspy--
- Tan Yinglan
The Way of the VC: Having Top Venture Capitalists on Your Board (On Amazon)
http://tinyurl.com/wayofthevc
Praise for Way Of The VC - Top Venture Capitalists on Your Board
"Yinglan gives valuable accounts coupled with insightful observations about the past, present and future of an industry that is still in its infancy-but growing up fast. It will also help entrepreneurs who need venture capital financing by showing them how VCs value-add to their companies. This book belongs in the library of anyone who has ever taken a serious interest in venture capital. "
Neil Shen, Founding Managing Director, Sequoia Capital China
"The Way of the VC" is the best book I have read on Venture Capital with thoughtful advice for the entrepreneur. Yinglan Tan captures the wisdom of the ages, with the vision of an oracle in this book that captures how a venture capitalist thinks, and how the best ones act.
Tim Draper, Managing Partner, Draper Fisher Jurvetson
This book is a practical guide to the interplay between VCs and entrepreneurs that often contributes to the meteoric rise or utter failure of a startup venture. As entrepreneurship and venture capital are slowly transitioning from ad hoc activities into professions, the common principals applied by experienced professionals are emerging as foundations. Yinglan Tan's book provides a solid account of these emerging foundations.
Noubar Afeyan, Managing Partner & CEO, Flagship Ventures
With the emergence of venture capital investment as a professional practice, understanding the way in which this industry works is critically important for practitioners and would-be practitioners, whether they are (or aspire to be) working for entrepreneurial ventures, venture firms, or large institutional capital pools. I applaud Yinglan Tan, who has distilled many interesting "war stories" and experiences of venture capitalists into a useful and effective framework in The Way of the VC.
Professor Josh Lerner, Jacob H. Schiff Professor of Investment Banking, Harvard Business School
"Yinglan gets into the minds of venture capitalists to show us how they think. There is much in common between VCs from the West and those from the East, but also much that is importantly different."
Tarun Khanna, Jorge Paulo Lemann Professor at the Harvard Business School and Best-Selling Author, Billions of Entrepreneurs: How China and India are Reshaping Their Futures and Yours
I have taught private equity courses for MBA's and executives for fifteen years, and I have seldom run across such insight. Based on painstaking research, Yinglan Tan has demystified the venture capital investment process. If you want to know how venture capitalists think, what they are looking for, and how to choose one, read this book. Venture investors looking to grow in Asia will find penetrating observations and valuable advice. I highly recommend this book to anyone interested in building high-growth companies.
Professor Philip Anderson, INSEAD Alumni Fund Chaired Professor of Entrepreneurship & Academic Director, The Abu Dhabi Centre
Top-flight entrepreneurs are blessed with terrific ideas and boundless energy. But they usually lack capital; hence they must join together with venture capitalists (VCs). The prescription is easy, the implementation tough. Entrepreneurs and VCs differ in orientation, background, and interests. In this lively volume, Yinglan Tan tells how entrepreneurs should handle the relationship from early-stage conception through to a thriving company. The pages bristle with insights gained from in depth discussions with successful VCs and entrepreneurs. It then imparts lessons distilled from intense study of the field and careful analysis. Entrepreneurs should take this volume to heart, and thus avoid missteps and grief.
Richard Zeckhauser, Frank P. Ramsey Professor of Political Economy, Harvard University.
"The Way of the VC" is a must-read book for entrepreneurs and venture capital professionals. Yinglan achieved a harmonious balance between the theory – the Commandments – and the practice – first-hand accounts by VC. The delightful stories clearly and effectively illustrate important lessons for all players in this industry.
Koh Soo Boon, Managing Partner, IGlobe Partners
Venture Capitalists rely heavily on personal judgment and experience. This extensive collection of shared wisdom and viewpoints is therefore a valuable addition to the growing number of VC textbooks and war stories. Yinglan has skillfully captured the Tao of VC practitioners and entrepreneurs in a lively and enlightening book.
Lin Hong Wong, author of "Venture Capital Fund Management: A Comprehensive Approach to Investment Practices & the Entire Operations of a VC Firm".
"Friendly, thorough, and helpful. Yinglan has shown how VC's can help an entrepreneur's business and how to attract their attention."
Dan Schwartz, former Chairman, Asian Venture Capital Journal and author, The Future of Finance: How Private Equity and Venture Capital Will Shape the Global Economy
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- Tan Yinglan
The Way of the VC: Having Top Venture Capitalists on Your Board (On Amazon)
http://tinyurl.com/wayofthevc
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