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Don’t Look at Your Cards: Part II

Liberating Strategies for Poker, Business & Life

In 1519, Spanish conquistador Hernán Cortés ordered his men to scuttle their ships upon landing in Mexico, eliminating any possibility of retreat and forcing them to go All-In on their mission. Starting with just 600 men, Cortés eventually toppled the Aztec Empire with over 200,000 warriors at its disposal.

In Part 1 of this article series, I shared the Power of All-In and several other applied game theory concepts that together help you play winning poker.

In Part 2 (below), we will discuss the concepts we learned in Part 1 as they apply outside of poker, to both competitive and collaborative business situations, and to life in general.

In Part 3, we’ll discuss the deeper game theory behind these concepts, which allow you to change the game and design new ones — whether your game is investing, entrepreneurship, parenthood, or even courtship!

Understanding the Nature of the Game

In Part 1, we learned that poker isn’t really a game of cards. It’s a game of strategic decision making under conditions of inherent uncertainty and risk.

By understanding the true nature of the game we are better able to determine the winning strategies, some of which may be counterintuitive. This is true in the game of business as well.

Many startup founders seek venture capital believing their VCs are playing the same game as them. In reality, while most founders are playing to create a successful company, most VCs are playing to create a “unicorn” (billion dollar company) and liquidate their position for a 100x plus return. They are not interested in taking a 3x return if they have a shot at 100x.

Jawbone was a startup that received nearly a billion dollars in venture capital, including legendary firms Sequoia and Kleiner Perkins. They aimed to become a unicorn through their innovative wearable technology and portable audio devices. While they did achieve unicorn status, valued at $3 billion at their peak, Jawbone was liquidated in 2017 and the investors lost big. It’s widely understood that Jawbone’s undoing was overfunding in pursuit of higher return multiples.

If you take traditional VC money, you are playing the Unicorn Game. Which means you will be forced to take big risks you don’t agree with; you will likely be pushed out of your own company before you are ready to give up control; and minority investors will get diluted if the lead VCs sense an opportunity to “save” the company with new funding when the company hits a rough patch.

Mark Zuckerberg understood the dangers of playing the VC’s game and so he decided not to play it. Instead, he made the VCs play his game by structuring the shares of Facebook into two classes: Class A for investors, and Class B for founders and early supporters. Class B shares have 10 times the voting power of Class A shares. As a result, Zuckerberg controls approximately 57% of the voting power in Meta, ensuring he retains control over the company despite owning a minority of the total shares.

Understanding the true nature of the game before you play allows you to avoid playing in games that are unfavorable to you, and to find strategies (like Zuck did) which turn the tables in your favor.

Don’t Look At Your Cards

In Part 1 we discovered that in poker, your cards are not the most important factor in your success. Rather it’s the timing of your bets (i.e. your position at the table), that trumps the cards you hold.

Bill Gross, creator of Idealab – the longest running technology incubator and one of the most successful –   found that timing trumps everything in venture investing as well. Here’s Gross’ analysis of the major factors contributing to startup success:

  • Timing: 42%

  • Team/Execution: 32%

  • Idea: 28%

  • Business Model: 24%

  • Funding: 14%

As investors, we get sucked into the big idea and we convince ourselves it’s going to be successful based on the business plan, when in reality that’s not what makes for a winning investment.

Focusing on the idea is the equivalent of focusing on the cards in poker.

The VCs know this. They also know that timing is impossible to get right on a consistent basis. Which is why they all say they are looking for great founders to invest in. After all it’s the founders who will execute on the idea and business model as well as making timing-dependent decisions.

The problem for VCs is not only are they in the Unicorn Game (which means they have to pick founders who are also in that game or mislead the founders as to their intentions) but picking winning founders is very difficult, especially if they don’t yet have a track record. Compounding the VC dilemma is the fact that their one point of control, funding, is the least important factor for the success of their investments.

All of which leads to much more optimal (and profitable) ways to do venture investing if you are an angel investor or family office. 

We’ll explore this more below, but for now, here’s what I recommend you focus on as a venture investor: integrity of the founders to their stated values, and their commitment to mutual success.

The reality is that most successful startups pivot at least once (if not twice) before funding their eventual success. For example:

For instance, some notable pivots include:

  • Instagram: Started as a location-based check-in app called Burbn, it pivoted to focus solely on photo sharing, leading to its explosive growth.

  • Wrigley: Initially sold household products, but pivoted to chewing gum in 1892 after William Wrigley Jr. began giving away gum as a promotional item and finding out the gum was more popular than the baking powder it was promoting.

  • Nokia: Started as a paper mill but pivoted to become a leading telecommunications and mobile phone manufacturer.

The Nokia example is even more interesting, as they’ve pivoted many times since their beginnings in 1865.

Wikipedia’s history of Nokia logos mirroring their many pivots.

The point for investors to realize is that you are not betting on your cards (the idea or products of the company) you are betting on its leaders.

In particular, you are betting on its leaders to occasionally make good gut level decisions on timing and the need to pivot, consistently make good strategic decisions relative to their current path, and always make good values-based decisions in integrity with their stated values.

As an investor, if you see inconsistencies in the founders’ decisions, especially the values-based decisions, you should pass on investing. Not only are they likely to alienate customers and partners over time, they will surely not treat you well as an investing partner when it counts.

On the flipside, founders who treat the people around them right, even if it means the company fails, will be your best investments in the long run. 

I can’t stress enough how not to get sucked into the allure of a great idea or technology or solution.

I’d rather bet on a person (or founding team) without an idea than bet on a great idea led by founders I can’t completely trust.

Don’t look at the cards, look at the people.

First & Last Mover Advantages

Timing is everything in both poker and business. Acting last in poker gives you the advantage of seeing everyone else’s moves before making your decision. This “last mover advantage” can be crucial. Conversely, making the first move forces others to react, often leading them into mistakes.

Take the story of the evolution of social media.

Friendster was the trailblazer in social networking, capturing the first mover advantage. It gained an early user base but struggled with technical and scalability issues, losing user trust.

MySpace seized the opportunity next. Learning from Friendster’s mistakes, it offered more customizable profiles and handled scalability better. MySpace grew massively, becoming the king of social networks for a time. However, its cluttered user experience and slow innovation caught up with it.

Facebook used its last mover advantage. Mark Zuckerberg scrutinized the missteps of Friendster and MySpace. He launched Facebook with a cleaner interface, enhanced user experience, and the groundbreaking News Feed. By entering the game last, Facebook avoided previous pitfalls and set new standards, dominating the social networking space.

In business, just like in poker, understanding when to act first and when to wait can mean the difference between winning big and going bust. First movers can create new opportunities, but last movers can perfect and dominate the market by refining what came before them.

Selective Aggression

My son started out his little league season this spring in a big hitting slump. By mid season he had still not gotten his first hit and it was weighing heavy on him. He would often get on base by walking and the rest of the time he would strike out.

His coaches were all very encouraging, analyzing his swing they said it looked great and that it was just a matter of time before he would be making contact with the ball and getting hits.

I felt there was something else going on that needed addressing. I noticed in a lot of his strikeouts he would go down looking, not swinging. When I asked him about this, he said he didn’t want to swing at Balls, only Strikes. His previous coach said he had the best eye on the team for discerning Balls and Strikes, and it seemed to be a point of great pride for him. When the umpire called Strikes he thought were Balls his jaw would drop incredulously and he would feel robbed by the ump.

So I took him aside after the game and told him about Selective Aggression.

I said it’s great that he’s selective about the pitches he will swing at and praised him for his discerning eye. And then I reminded him that the goal was to hit the ball, not be correct in his judgment of Balls vs Strikes. If the umpires have a liberal strike zone, he needed to become less selective and more aggressive. Baseballs don’t hit themselves, I told him, “you’ve got to swing the bat.” Better to go down swinging at a Ball than looking at a Strike.

The tricky thing about Selective Aggression is that Selection is a thinking process and Aggression is an emotional process. They require two different parts of your anatomy and competence. It’s often difficult to transition from thinking and being selective to acting aggressively, but that’s exactly what is needed to be effective. This is the same whether it’s in hitting baseballs, playing poker or doing business.

Because my son was thinking about the pitches he wanted to hit rather than reacting instinctively, I gave him one more tip: step towards the pitcher as he’s releasing the ball and assume you are going to swing at it; then if it’s not a good pitch to hit you can lay off it. This is what it means to be aggressive.

The next game after that discussion with my son, he got his first hit, a single up the middle, scoring two of his teammates. He finished out the season with at least one hit in every game, including going 3 for 3 and a game-winning RBI double in the playoffs.

Looking for the Betting Patterns

In Part 1 we learned how important it is to focus on the betting patterns – where and how people are committing their resources. The same is true when you are looking for investment opportunities.

Let’s say you are a Family Office looking to invest in early stage VC funds as a Limited Partner (LP). Here are some well-known facts about early-stage VC funds:

  • The target return multiple for a fund is 3x

  • However, half of all funds lose money for their LPs (i.e. less than 1x multiple)

At first you are perplexed. How can the average fund return 3x but the median return be 1x? Then you remember your college statistics class and you realize the distribution of startup investment returns must be very skewed: most of the startups fail and the few that succeed return 10x or more.

As you begin interviewing VCs you ask them how many startups they invest in. It varies slightly with the average being around 25. Clearly this isn’t diversified enough for them to capture their fair share of home runs.

So you look online for any analysis of proper diversification and you stumble across this:

Bingo! The hidden pattern has become clear: to give yourself a 90% chance of getting that 3x return, the VC fund you invest in must have 400 startups, not 25. Or you could spread out your bets across 16 different VC funds which each invest in 25 startups.

Exploitable hidden betting patterns like this exist in every industry. But you won’t learn them by talking to the established folks in the industry, as they usually have a vested interest in keeping you in the dark. You need to seek out the information, and when you find yourself perplexed by what seems to be conflicting data, start digging further.

Proper Bets Sizing

In her bestselling book, Thinking in Bets, Annie Duke explains how our bet sizes should be in proportion to our confidence about winning outcomes. We don’t want to bet too much when the risk is high relative to the reward, and we don’t want to bet too little when the reward is high relative to risk.

In Part 1, we discussed how this applies to your bets in poker. But how about business?

The entire Lean Startup movement is based on the concept of proper bet sizing. Prior to the Lean Startup, technology was developed using the “Waterfall” model.

The Waterfall model makes large upfront bets on project requirements and design, risking significant losses if initial assumptions are wrong, due to its sequential and inflexible nature. In contrast, the lean startups place smaller, incremental bets by developing and testing minimum viable products (MVPs), allowing for frequent adjustments based on real-time customer feedback. This iterative approach with small bets minimizes risk and achieves better quality, faster overall development.

Similarly, the world of professional baseball (and now other sports) were revolutionized by proper bet sizing when Oakland A’s manager, Billy Beane introduced “moneyball”. First popularized in the book by Michael Lewis, Moneyball was then made into a hit movie starring Brad Pitt.

Prior to Beane, the conventional wisdom amongst baseball managers and owners was that home runs win games. The problem for Beane is that the Oakland A’s had a limited budget and home run sluggers were expensive.

With the help of assistant Paul DePodesta, Beane was able to prove, first statistically, and then empirically that a focus on on-base percentage and overlooked player skills he could build a competitive team on a limited budget, ultimately leading to more consistent success.

In 2002 under the moneyball strategy, Oakland won 103 games (losing only 59), tying for the best record in the American League. They also set an American League record with a 20-game winning streak.

After witnessing the success of the Oakland’s moneyball strategy, the Boston Red Sox sought to implement a similar approach to proper bet sizing. They hired Theo Epstein as their general manager in 2002, who in turn hired Bill James — an outsider to baseball who was a statistical guru to fantasy baseball players — to be Epstein’s Paul PoDepodesta.

According to a 60 Minutes interview, the moneyball strategy contributed significantly to the Red Sox breaking their 86-year World Series drought by winning the championship in 2004 and again in 2007.

Winning Without a Showdown

One of the most exciting parts of poker is all the conflict and showdowns. But from a strategic perspective, the ideal situation is to win hands without any showdowns. Imagine if every time you made a big bet, all your opponents would fold. You would never lose a single hand!

As a father of three boys, I find myself intervening and mediating a lot of conflict. The worst is when they are fighting and I’m trying to get them out the door for school.

I don’t often find a way to win without a showdown, but one day I was fed up with the situation and I vowed to myself I would get them out the door on time, without resistance, without them interfering with one another, and without raising my voice or micromanaging them.

The key to winning without a showdown is understanding people’s motivators. I knew my kids love watching cartoons on weekend mornings. Instead of letting that be the default, I decided to make TV conditional on them acting as a team to get out the door on time each day without my prompting. Either they would all get TV time or none of them would. “It’s one for all and all for one,” I told my boys.

While the kids felt it was unfair that their individual TV fate was in the hands of their brothers, I knew that if I didn’t impose that condition, they would sabotage each other and we’d be worse off than before. After all, what’s better than getting to watch TV? Getting to rub it in your brothers’ face, of course.

I was shocked at how well my gamification worked.

Poker is a zero sum game: for me to win you must lose. But business and certainly family life are win-win. Thus there are many opportunities to win without conflict or a showdown. Sometimes you just have to be creative to find the correct strategy.

Looking for Tells & Tilt

Understanding motivators (Tells) and triggers (Tilt) is a critical skill, and not only for working with kids. Let’s look at business negotiations.

Imagine you’re negotiating a strategic partnership with another company, led by Sarah. Both parties want to achieve a mutually beneficial agreement, so the cards are on the table, and the focus is on collaboration.

During discussions, you notice Sarah becomes particularly animated and engaged when talking about sustainable practices. This is a Tell, indicating that sustainability is a key motivator for her. You decide to propose joint initiatives that enhance both companies’ sustainability efforts, aligning with her passion and creating value for both sides.

At one point, the conversation stalls over budget allocations. Sarah starts to show signs of Tilting, such as tapping her fingers and taking deep breaths, indicating frustration. Recognizing this, you suggest taking a break to diffuse the tension. During the break, you think about how to address her concerns without compromising your objectives.

When you reconvene, you propose a flexible budget plan that includes phased investments and shared costs for sustainable projects. In short you are proposing a lean startup approach. This resonates with Sarah, as it aligns with her sustainability goals and eases her budget worries. She visibly relaxes and becomes more collaborative.

By identifying Sarah’s Tells and managing her Tilt, you guide the negotiation towards a win-win outcome. Both parties leave the table with a strategic partnership that leverages their strengths and aligns with their core values, fostering a long-term, productive relationship.

In collaborative negotiations, understanding and responding to the other party’s motivators and triggers can transform potential conflicts into opportunities for mutual gain, ensuring that everyone walks away satisfied.

The Power of All-In

Over the course of my angel investing career the idea that I should be betting on founders (not ideas) slowly dawned on me. But what qualities should I be looking for in founders? Certainly moral character is crucial. But there’s an equally important quality I’ve found which is being All-In on the success of one’s venture.

I recall with mixed emotions a startup I invested in with incredible seasoned founders of impeccable character. Things were going great until their first big roadblock. Instead of going All-In to remove the roadblock, they folded the company. Why? Because one of the founders had another priority in their life that would have been jeopardized if they continued operating the company.

While I was outwardly understanding and supportive of their decision, inside I was kicking myself for making the investment. I knew that the road would be long and very bumpy – it always is. And had I spent more time with the founders prior to investing, I would have learned that this was not their number one priority.

On the flipside, there was another startup I invested in, founded by a friend of a number of years, where his All-In commitment to success (along with his character) is about the only thing that has made this a successful investment. Originally “Chip” (as we’ll call my friend) had co-founders and an idea to revolutionize adventure travel with a smartphone app. Everyone, including me, was excited about the idea, the team and the opportunity.

About a year into the project, Chip and the other founders were fighting, and it was clear that a break up was going to ensue. Normally this is the death of a fledgling company, and it would have been, if Chip weren’t All-In and committed to making it a success, and honoring the commitment of his initial angel investors.

The company had no resources to buy the other founders, so Chip decided to dissolve the company with an agreement that his co-founders and he could each split whatever intellectual property and ideas and run separately with them.

Then, he started a new entity, and gave me and the other investors (all friends of his) equity in the new company, without putting up more money, as if we had invested it.

Chip’s All-In commitment didn’t end there. The original idea turned out to not be a viable one (at least given the market timing and other factors). So they pivoted to mobile games. And then pivoted to nutrition and lifestyle. And then to event management. And finally to AI for insurance companies before finding the traction to create a truly viable business. This process took the better part of 8 years of pivoting not only the idea but also teams of employees.

Looking back on my investment, the only thing that hasn’t changed multiple times is Chip himself, and the original investors who backed him.

The Fun Factor

In December of 2001 my buddy, Phil, and I were relaxing, having a beer or two (or three) at Victoria Falls in Zimbabwe. We had just completed a three week overland safari and capped it off by hitting up the local casino. We wanted to see if we could bring down the house with our blackjack card counting skills.

We played small at first, making obvious betting patterns that would peg us as card counters, if the pit boss were paying attention. Satisfied he was not, we went to the ATM, withdrew as much as it would dispense, and went back to tables with $40,000 Zim Dollars.

Selective aggression, we thought to ourselves: this was going to be a big score. But we failed to properly size our bets, overbetting what was prudent given our 1% edge, and  quickly went bust. Lucky for us, the local currency was beginning to hyperinflate and our $40,000 Zim Dollars only set us back about $80 U.S.

Vowing to return the next day once the ATM got reloaded, Phil was itching for action and wanting to bet me on the number of hippos that go over the falls each year. I was not falling for that trap though, as I assumed he’d looked it up previously and was trying to take me for a ride.

Pivoting to a different type of action, Phil turned to me (okay maybe it was four beers by this point) and said nonchalantly, “Ya know, Rafe, I’ve always wanted to get an RV and do a year-long sports road trip–”

“I call your bluff! I’m All-In!” was my reply.

Hence was born, The Ultimate Sports Adventure: Two Guys in a Monster RV on the Greatest Road Trip in Sports History(TM).


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