Texas Hold’Em as a Model for Technology Startups

Texas Hold’Em offers some useful models for technology startups: pick the right table (competitors) and understand how your cards best combine with common cards (the status quo and adjacent possible)

Texas Hold’Em As a Model for Technology Startups

Too many people see innovation as the “Ah-Ha” or “Eureka!” moment that takes place in the mind of lone genius inventor. I have had the opportunity of working on new products with some extremely bright people who could see not just three but five or six steps ahead. But even with them on the team it still took a team to bring the product to market. And it required a focus on adding as few novel elements as possible and leveraging as much of current practice and existing off the shelf technologies and components to minimize risk and the cost of the transition.

This is why I think it’s more useful to think about an innovation like your hole cards in a game of Texas Hold’Em. Like your hole cards you often cannot win unless you can combine your own technologies and ideas with one or more of the common cards–the status quo of pre-existing technologies. The best you can you can do with your hole cards is a pair of aces. If another has a two and a three and there is a two and a three in the common cards their two pair beats our one pair.

Seven Insights From Texas Hold’em For Startups

Texas Hold’em is a useful model for startups and technology change for several reasons:

• Opportunity Cost There is an opportunity cost to try to research and develop your own product
  Texas Hold’Em: this the ante you have to pay before you can see your hold cards.
• Sometimes You Are Forced To Bet Not everyone pays the same development costs and sometimes you are forced by customers or partners or investors to try to develop a new product.
  Texas Hold’Em: these are the blinds, forced bets imposed on some players
• Not All Research Leads to a Useful Technology or Interesting Prototype You can research and prototype many possible products before paying development or marketing costs.
  Texas Hold’Em: there are a sequence of hands, once you have paid the ante you can choose to fold and wait for the next hand.
• Ultimately Product Value is Determined by Product-Market Fit The value of your product is a function both of it’s unique capabilities and it’s fit with the market.
  Texas Hold’Em: you hole cards are your unique technology, but they must be combined with common cards
• Launch Costs > Development Costs > Prototype Costs > Research Costs It costs more to explore the market than to develop a prototype and you have to invest before you know the real value of your product in the market it matures.
  Texas Hold’Em: there are four betting rounds (pre-flop, flop, river, and turn plus forced bets of ante/blinds) before you see the final set of 5 common cards, it can be expensive to stay in.
• Competitors Can Bluff Competitors can bluff you about their true capabilities, they can also force your to prove your claims.
  Texas Hold’Em: other players can bluff you and call your bluff.
• Study and Explore Markets Before Committing to Them You can make a preliminary analysis of different markets and who is already competing in them, how much money they appear to be able to invest, before you decide to enter a market. You can also enter different markets (sometimes abandoning one that you are in) if appear more hospitable.
  Texas Hold’Em: you can pick the table you want to play at based on who is already seated and you can change tables.

Tony Hsieh’s Lessons from Poker

Here are a selection of rules of thumb Tony Hsieh offered in a Dec-27-2008 post “Everything I Know About Business I Learned from Playing Poker” and Dec-30-2008 post Poker, Business, Life: It’s Never Too Late to Change Tables

Niche Selection

EVALUATING MARKET OPPORTUNITIES

• Table selection is the most important decision you can make.
• It’s okay to switch tables if you discover it’s too hard to win at your table.

Tony Hsieh in “Everything I Know About Business I Learned from Playing Poker“

He elaborated on this Dec-30-2008 post Poker, Business, Life: It’s Never Too Late to Change Tables

The game starts even before you sit down.

When you’re in a poker room, usually there are many different choices of tables that you can sit down at. Each table has different stakes, different players, and different dynamics that change as the players come and go, and as players get excited, upset, or tired.

As a poker player, the most important decision you can make is which table to sit at. This includes knowing when to change tables. An experienced player can make 10 times as much money sitting at a table with 9 mediocre players who are tired and have a lot of chips compared to sitting at a table with 9 really good players who are focused and don’t have that many chips in front of them.

In business, one of the most important decisions you’ll make is what business to be in. It doesn’t matter how flawlessly you execute your business if you’re in the wrong business or you’re playing in a small market.

Or, if you decide to start a business that competes directly against really experienced competitors such as Walmart by playing the same game they play (for example, trying to sell the same goods at lower prices), then chances are that you will go out of business.

Whether in poker, in business, or even in life, it’s easy to be so engrossed in what you’re doing right now that you forget that you always have the option to change tables. Psychologically, it’s hard because there’s a lot of inertia to overcome.

It’s never to late to change tables, and it’s never too late to ask yourself whether you’re playing the right game.

Tony Hsieh in Poker, Business, Life: It’s Never Too Late to Change Tables

Selecting the right market niche–often as much as result of chance and necessity and strategy–is critical for early traction and the initial viability of your startup. Smaller markets–low stakes games–are less attractive to more experienced players: if you are still moving down the learning curve they offer a lower cost education that can allow you to stay in the game long enough to gain proficiency.

Risk Management

FINANCIALS

• Always be prepared for the worst possible scenario.
• Play only with what you can afford to lose.
• Make sure your bankroll is large enough for the game you’re playing and the risks you’re taking.
• Remember it’s a long term game. You will win or lose individual sessions, but it’s what happens in the long term that matters.

Tony Hsieh in “Everything I Know About Business I Learned from Playing Poker“

For bootstrappers this means defining your “stopping rule” not as bankruptcy but as leaving enough money in savings to have time to find a job. It also means assuming it will take at least three iterations of a product or service to get to break-even and as many as five or six to truly start to turn a profit. It’s not just money: treat social capital with the same care as you do cash. It’s key relationships that sustain you and allow you to play a long game. People will forgive you for errors in judgement much more easily than ones that demonstrate poor values.

Managing Your Emotions on the Entrepreneurial Roller Coaster

STRATEGY

• Figure out the game when the stakes aren’t high.
• The players with the most stamina and focus usually win.
• Don’t let yourself go “on tilt”. It’s much more cost effective to take a break, walk around, or leave the game for the night.

Tony Hsieh in “Everything I Know About Business I Learned from Playing Poker“

Lower stakes is less risk and therefore less fear. Detecting when you are aware of failure as a real possibility and acting prudently vs. panicking out of fear of failure is a hard distinction to discern. Especially when you are acting out of fear.

Two Ways Texas Hold’Em Is Misleading

There are two ways that Texas Hold’Em and other poker games offer misleading models for entrepreneurs.

1. Business is Not Zero-Sum: a successful startup will collaborate much more than compete. Deals have to be a win for customers as much as for you. Obviously markets can be highly competitive, and the more desirable the market the more competitive it can become, but cooperative strategies are at least as important as competitive strategies.
2. When You Bluff You Risk Confusing Customers and Partners as much as you competition. Two recent high flyers–Zenefits and Theranos–bluffed their customers and partners (and at least some of their investors) as much as they did competitors. Entrepreneurs do as much to create value for others as they do to “beat competition” and “win deals.”

Related Blog Posts

• Crafting Deals with Customers and Partners
• See What’s Missing: Careful Observation is Key to Success
• Zero Sum vs. Quid Pro Quo
• Entrepreneurial Mindset: Create Value For Others
• Entrepreneurs Exploit Errors in Conventional Wisdom
• See What’s Missing: Careful Observation Key to Success

Image Credit “Strategy Tips For Texas Hold’Em”

Update Feb-1-2021: Tristan Kromer published an interesting article “How to Win at Startup Poker” that also uses Texas Hold’Em as a paradigm for analyzing key decisions startups have to make. It takes a very different approach and is worth reading. His key take-aways:

• Startups are like poker, not chess.
  By this he means you have limited information about opponents position and pieces; this also allows them to bluff in a way that a chess player cannot.
• Buy information if you have a halfway decent set of cards.
• Be humble.
• Beware of latecomers who could wreck your game.
• You can’t win every hand, but as long as you have resources you can keep playing.