If poker is all about the cards you’re dealt, why are some players so successful?
Are they just good bluffers? Or do they have skills that entrepreneurs could do to learn?
If the only exposure you’ve had to poker is watching movies such as Casino Royale, you could be excused for thinking that poker is a game for bluffers and body-language experts. Although there are undoubtedly aspects of that in the game, any competent poker player would describe it as a game of skill underpinned by some basic principles that everyone can learn. As an entrepreneur, I think those principles translate well into how to run a startup, particularly if you’re a fan of the Lean Startup methodology.
For those that don’t know the rules of poker, I’ll keep this high-level. For those that do, my apologies for the lack of detail!
Lesson 1 – Choose Your Bets
Any good poker player will be able to give you the approximate odds of their hand winning based on the cards they can see. It may seem complicated to the novice, but the experienced player will do this rapidly and repeatedly as each hand progresses based on memory, experience and rules of thumb.
What surprises most poker novices is that the pro players tend to fold more hands than they bet on. Even if they have a reasonable hand, they know that their chances of winning might be too low for other reasons (for example their position in the betting order can put them at a disadvantage). Most are patient, conserve their chips and wait for the right hand and the right position.
Novices by contrast bet on far too many hands, a behaviour psychologically reinforced by the occasional unlikely win even though the overall result is for them to lose.
As a tech startup, our primary bets are the development choices we make and the effort we put into the opportunities we pursue.
Like the novice poker player, it is tempting to invest (place a bet) on lots of features thinking this will increase sales. The core principles of Lean Startup Methodology and the related Hypothesis Driven Development is to avoid unnecessary development by quickly validating features with your market. However, depending on your business, even small tests can take time and money to validate so you still need to prioritise ruthlessly.
Similarly, many tech startups make the mistake of wasting too much time and money chasing the unlikely investors, partnerships and/or major prospects. Time-wasters are everywhere and knowing who is worth betting on is vital. It’s almost certainly not just the first ones to take your call.
Lesson 2 – Spread Your Chances
In poker, it doesn’t matter how good a hand you’re dealt, you can still lose as other cards come down: even a pair of aces is no guarantee. And some hands may look promising but never actually amount to anything.
A good poker player is not a gambler – they play the odds. If any particular hand has a 20% chance of making ten times the money bet, then it’s worth playing but only if they have sufficient money to play enough of those kind of hands.
If you only have the money to play it once, you have an 80% chance of ending up with nothing: that would be a gamble. Conversely, if you can play the same hand ten times, the odds of you ending up with nothing is about 11%: that’s a calculated risk. And in every other circumstance, you win at least once with a pretty good chance of winning multiple times.
From a startup perspective, we need to have the same mentality. Even if we’ve carefully selected features to develop based on early feedback (our ‘good bets’), we need to carefully assess how likely they will lead to revenue and how much we can invest in building that feature.
This can be particularly true for B2B startups who often offer free pilots to secure their elusive first client alongside their valuable testimonials. The risks of unclear success, lack of commitment, scope creep and significant custom work can all be high and easy to ignore when the prize seems so great.
Lesson 3 – Look for Unfair Advantages
I mentioned above that for a poker player, the position they have in the betting order is an important part of evaluating the strength of their hand. In general, it’s an advantage to be the last person to bet because you see how everyone else bets first.
Another common tactic for a player who has amassed a larger pile of chips is to raise the bet against those with fewer chips. By doing so, the ‘chip bully’ can put the person with the fewer chips into a position where losing the hand is too expensive, often forcing them to fold even though they may have held the better hand.
In other words, they look for and exploit ‘unfair advantages’.
In the ‘Lean Canvas’ summary business plan, Unfair Advantage is a key topic that every startup should be able answer. It encompasses how you intend to beat your established and emerging competition and may include first to market, exclusive deals, patents etc. If you don’t have one, you need to focus on creating one. It needs to be something that you can sustain too because your competition won’t just go away if you begin to bite into their customer base.
Unfair advantages can change and may also appear on a smaller scale. You need to be on the lookout.
Every sales person knows the value of a personal network and a close contact on the inside can give you an unfair advantage with a particular sale. Similarly, being an existing supplier to a company will give you an unfair advantage in bidding for extra work vs a company that is not. These are unfair advantages you can cultivate through networking, consultancy-driven sales etc.
You also need to look out for when others have the Unfair Advantage. Big companies will tend to contract with other big companies. If a bidder for a contract has written the RFP, they will have the inside track. And if your competitor’s chairman plays golf with your prospect, you might want consider bowing out on that bid, no matter how much everyone assures you of a level playing field.
Lesson 4 – Know When to Fold
No matter how well a poker player selects the hands to play and how much advantage they may have started with, luck is a factor in poker as in life. It is human nature to want to keep betting when you’ve already committed a large chunk of money (particularly if you started with a great hand) but the good player knows when the odds have turned and will save the rest of his money for future hands.
As startups, there are often tough moments when we need to know when to fold. This can take various forms of different severity: bowing out from a bid; cutting the team to conserve costs; dropping a product; or retreating from a country. If you don’t do those early and when needed, you risk losing your business. And even if you do, there are times when you may still have to fold your business to save your personal finances and family welfare.
The important point is to be able to constantly and objectively re-evaluate your odds in terms of where you are and not where you’ve been.
Lesson 5 – Keep Bluffing to Minimum
Every poker player likes to be able to say they won a big pot on a complete bluff but the reality is that it’s a high-risk tactic. Most novice players bluff too often and don’t understand the finer points of how to do it effectively. The result is they get caught out and lose big.
In practice, most professional poker players tend to use the ‘semi-bluff’: they don’t have a winning hand immediately but they actually have a reasonable chance of getting one. The odds of this are part of their calculations as are the odds that they can force the other players to back down based on their previous behaviour, the size of the bet, how much money they’ve still got etc.
Let’s be honest. No, really, let’s be honest. It’s actually the best policy.
As a startup, trust is a huge factor you’ll want to cultivate within your team, your early clients and your market. Getting caught with a big bluff (aka ‘lie’) can be highly damaging. If you make false representations to investors, you may even find yourself personally liable to repay them if things go wrong.
In sales, a little semi-bluffing may sometimes be OK as long as you keep your sales team under control: saying you have a feature when you’ve never considered it is going too far; but saying you have one when it’s under development and can demonstrate something is probably ok. At the end of the day, you need to be able to deliver on your promises.