Startups and poker

I enjoy drawing parallels between poker and life — especially business. Today I’m going to speculate on how launching a tech startup is similar to playing a poker tournament. The comparison is of course not meant to be perfect; rather, it’s meant to spawn discussion as well as elucidate the overwhelming challenges that face the crazy, brave souls who choose to pursue either (or both!) of these Herculean endeavors.

The numbers. 

Most startups fail. No one wants to hear that, but that’s the simple truth. The actual numbers involved are also remarkably similar to those of a single large field poker tournament. About 10% of players will make the money — that is, not lose their initial investment. Most of these will just barely break even or make a small return. This is congruous with the startups that show some signs of success: they have some traction, possibly a few paying customers, good press and feedback, early interest from investors, or they may be on their way to being a sustainable small business. If you’re lucky you even might have made the final table and gotten a small seed investment.

Yet only less than 1% of the player pool will accomplish what they truly yearn for when registering for a tournament, wide-eyed and high on hope. There aren’t many reliable figures on this, but I would wager that 1% is a decent estimate of companies that receive venture funding.[1] (We can use this as an OK metric for the success of a startup, though of course even a smaller percentage of VC backed companies survive after several years.) One percent. It speaks for itself.

Overconfidence.

Clearly EVERYONE who enters a tournament or starts a company believes they can and/or will succeed. And while very aware of the risk and variance involved, the participants greatly overestimate their chances. Classic overconfidence and optimism biases. Interestingly, the effect of the optimism bias is heightened in rank order situations, in which prizes aren’t directly congruous with performance, but rather accrue to the top of the field.[2] Sound familiar?

The ramifications of a truly low success-rate are even worse in business than in poker; most players are used to losing (brutal, unfair, spirit-crushing losses) many times before having a big score. With startups, however, entrepreneurs usually don’t have the luxury of starting many companies in a short period of time.

This is one reason why the lean startup movement has garnered so much attention and has been adopted by so many existing and aspring entrepreneurs. For one, it preaches the mantra of failing fast — learning from mistakes and then either pivoting or moving on. Secondly, it warns not to trust yourself too much, but rather make decisions based on well-constructed (reliable and valid) metrics. As in poker, the best metric is your balance sheet.

Plugging leaks.

Just because the odds are stacked against you doesn’t mean you can’t improve your chances! In fact, you MUST constantly be improving in poker and in business just to stay afloat. These are really the same tasks in both fields: study, constant feedback, data analysis (*cough* PokerGlyphs *cough*). Also, be active in the community! This will have lots of positive externalities, including the all-important mental support of helping you get through the low points.

Resiliency, tough-mindedness.

It takes a certain character with a very specific personality and a liberal dose of craziness to pursue, let alone succeed, in either of these endeavors. Research shows, unsurprisingly, that the traits which correlate to entrepreneurial success include need for achievement, self-efficacy, innovativeness, stress tolerance, risk tolerance, need for autonomy, and sensation seeking.[3] Sure sounds like a lot of great poker players I know! Both entrepreneurs and poker players also tend to score lower on Agreeableness and Neuroticism (two factors in the Big Five personality scale), with low Neuroticism actually correlating strongly to poker success.[3, 4]

The above factors are what allows individuals to cope — actually, persevere — in the face of extreme stress and uncertainty. And that’s a rare blend.

Enjoying the journey.

Don’t pursue either of these if your goal is solely to make money. One more time: most startups fail and most poker players lose. You must enjoy the ride if you want to keep your sanity. This much I can say from personal experience in both domains: there will be extreme highs, there will be devastating lows… but mostly it will simply be long stretches of unremarkable and hard work — so you better enjoy it! However, at the end of the day, if you are cut from a certain cloth, then you know you really never had a choice to do anything else. A player’s gotta play.

 

References

[1]http://www.quora.com/What-percentage-of-startups-get-VC-or-Super-Angel-funding-and-why-is-100-of-the-press-government-and-blogospheres-attention-on-them 

[2] Fresea, M. & Raucha, A. (2007). Let’s put the person back into entrepreneurship research: A meta-analysis on the relationship between business owners’ personality traits, business creation, and success. European Journal of Work and Organizational Psychology, 16(4), 353-385. 

[3] Overconfidence effect. (n.d.). Retrieved from http://en.wikipedia.org/wiki/Overconfidence_effect

[4] Shane, S. Entrepreneurship and the Big Five Personality Traits: A Behavioral Genetics Perspective. Retrieved from http://faculty.weatherhead.case.edu/shane/Entrepreneurship%20and%20the%20Big%…

[5] Fayngersh, P. & Kizelshteyn, M.I. (2010). The Personality of Online Poker Players: An Initial Inquiry. Retrieved from http://fifthidea.com/personality/