Hold em or Fold em

Walter Matthau

According to that sage voice of reason, Walter Matthau, “[Poker] exemplifies the worst aspects of capitalism that have made our country so great.” I most whole heartedly agree.
Checkers is Good, but Poker is Better

As discussed in “Tom and Huck”, some entrepreneurs prefer to plan, rather than execute. These analytical entrepreneurs enjoy solving complex problems. In some instances, such entrepreneurs fall victim of their analysis delight and inadvertently increase the complexity of their problems. If given the choice, I would rather compete against Tom, rather than commonsense Huck. Competing with someone who thinks they are the smartest person in the room, even when they actually are the smartest person in the room, is generally advantageous. While the smart person is busy trying to craft complicated plans that will out-smart you, you can focus on executing the basic tactics necessary to make costumers pull out their wallets and hand over some of their precious lucre. Unlike “Monopoly”, poker does not offer players the chance to negotiate, nor does it expose players to business issues such as mortgages, interest, taxes, etc. Even so, Poker is an excellent proving ground for a number of skills savvy entrepreneurs on The Fringe should cultivate.

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Seven-card stud is especially analogous to business. In this version of Poker, two cards are initially dealt face down, and one card is dealt face up. Betting then ensues for three more rounds in which an additional card is dealt face up. The final, seventh card, is dealt face down, at which point betting is concluded and a winner is declared. The next time you play Seven-card stud, consider the following commonalities with business:

  • You can see some of your competitors’ cards as they are dealt, but three of the seven cards are unknown to you
  • You must make financial commitments with partial data, and within the context of an uncertain future
  • The competitive landscape changes, sometimes dramatically, with each new card that is dealt
  • You can make educated guesses regarding your competitors’ resources and intentions, but such guesses entail uncertainty
  • Exogenous factors (also known as ‘luck’), can have a significant impact on your adVenture’s success, and yet are entirely out of your control

As noted in the “MBA Education and Other Oxymorons” entry, my roommates and I initiated a weekly Poker game while attending Wharton. Every Thursday evening (there are no Friday classes at Wharton, so the ‘weekend’ starts on Thursday) a group of Wharton MBA wannabes would sit down to a rousing game of cards. We played penny ante, dealer’s choice, with an emphasis on drinking and having fun. However, I still managed to learn a thing or two from this adjunct Wharton study group.

Ante-up - Just like in business, there is a cost to playing each hand of Poker. You have to toss in your ante at the start of each hand and you have no idea if you will ever get it back. It is the cost of admission, just like the sweat equity you put into your adVenture, never knowing if your efforts will yield a return.

Lady Luck – Luck is alive and well in poker, as in any card game. The same is true in the startup game. However, as in cards and real-life, you can have a dramatic impact on your ultimate success by ensuring that you recognize a ‘lucky’ opportunity when it presents itself, and that you augment your ‘luck’ with sound, strategic decisions. You have to make the best of the cards dealt to you, both in Poker, and when charting the course of your adVenture.

King Cash – If you run out of money while playing poker, you are done. Even if you are holding a winning hand, if you cannot convince the other players to ‘spot’ you, or otherwise borrow the money, your cards are worthless. The same is true at your adVenture. You may develop a winning product that you know customers are willing to buy, but all is for naught if you do not have the cash to execute your plan and deliver upon your product’s value proposition. Managing your cash by strategically placing your bets is equally important in life on The Fringe as it is in poker. For more insights regarding cash management, see “Frugal Is As Frugal Does”.

Grinder – In poker parlance, a “Grinder” is a player known for their solid and consistent style of play. Such players have the cash management skills necessary to stay at the table and wait for a ‘winning hand’. In business, such players are known as serial entrepreneurs. They have the stamina and tenacity required to continually try new avenues until they identify a successful business model which they then execute mercilessly.

Make Them Pay – Once you have a winning hand, you have to bet aggressively. However, if you come on too strong or too quickly, you risk spooking one or more of the other players into folding, thus decreasing the overall size of the pot. If you bet too conservatively, you may also end up with a suboptimal pot, as the other players may not contribute as much to the total as they would otherwise be inclined.

In business, you also have to run hard and fast when you have a winning solution. If you find a market niche or product category in which you are dominant, you must make the necessary financial bets to help you maximize the return from such opportunities. The one thing you can count on is that a good thing never lasts. If the opportunity is good for you, you can be sure competition will eventually emerge and gladly diminish your share of the advantageous opportunity.

Poker Face – According to Poker Professional Amarillo Slim, “It never hurts for potential opponents to think you’re more than a little stupid and can hardly count all the money in your hip pocket, much less hold on to it.”

Amarillo’s advice is consistent with what we learned in the “Competing From The Fringe”; get to know your competitors on a personal basis. This will allow you to better interpret their words and actions. The same is true with Poker. The more you know about your fellow players, the better job you will do of reading their mannerisms, betting styles, bluffing techniques, etc. Be vigilant and keep your eyes on your competition. Watch their moves, and then extrapolate their potential future decisions based on their past behavior.

While watching your competitors, you must also maintain your composure, irrespective of the cards in your hands. Just like in business, your goal is to melt into the fabric of the game, not to become the center of attention. Let the other players focus on each other, while you quietly sit back and count your mounting pile of chips. At your startup, maintain a poker face, stay out of your competitors’ crosshairs, and keep them guessing whether or not you have a ‘winning hand’.

Hold and Fold – “If, after the first twenty minutes, you don't know who the sucker at the table is, it's you.” ~Author Unknown

At the risk of conjuring a bad Kenny Rogers song in your head (I know, is there such thing as a ‘good’ Kenny Roger’s song…?), in business and when playing Poker, you really do need to know ‘when to hold em’ and ‘when to fold em’. This is where skill separates the consistent winners from the perpetual loser. If you have been appropriately attentive of the cards that have been previously played, you can calculate the basic odds of completing the various remaining winning card combinations.

For instance, if you are holding two Kings, and you have already seen one of the other Kings come into play, the probability of building a hand with three kings is diminished significantly. You must make the same type of basic probabilistic calculations when guiding your adVenture. However, do not make a Tom Sawyer mistake and attempt to calculate the probability of every permutation in your hand to the third decimal place. Be like Huck. Make a commonsense estimate of the approximate likelihood of building one or two potential hands, keep your mouth shut, and your eyes and ears open.

Dealer’s Choice - Dealer’s Choice is a variant of poker in which the person who deals the cards rotates from player to player with each hand. The dealer is allowed to call the game and establish the rules. A number of poker games offer the dealer an inherent advantage with this variant, as they can see all of the other players’ cards before having to decide on their next move. Business offers market leaders similar advantages. By establishing the industry standards and creating a sustainable first mover advantage, it can be advantageous to be the dealer’ and force your competition to follow your lead. When it is your turn to deal, always call a game that plays to your team’s strengths.

According to noted poker author Anthony Holden, “Whether he likes it or not, a man’s character is stripped at the poker table; if the other players read him better than he does, he has only himself to blame. Unless he is both able and prepared to see himself as others do, flaws and all, he will be a loser in cards, as in life.” Tom Sawyer’s lack of self-awareness would make him a welcomed poker adversary.

You can learn far more about business playing a few hands of poker than you will learn in a hundred rounds of golf. Business and poker are both games to be played for fun and to win. As Anthony Holden once said, "Poker may be a branch of psychological warfare, an art form or indeed a way of life – but it is also merely a game, in which money is simply the means of keeping score."

With Walter Matthau as your guide, you no longer need to sneak out to play cards. The next time Poker Night rolls around, tell your significant other that you are not simply playing cards; you are honing your entrepreneurial skills. Put down your clubs, pick up your cards and toss out your Kenny Rogers CDs…its Poker time.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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