“What does gambling have to do with investing?”
The name Damiere Byrd probably doesn’t mean much to you. It was NFL week 15 and I was playing in the Draftkings.com Fantasy Football World Championship. The Panther’s starting wide receiver was injured and Byrd was getting his first NFL start. Most people wouldn’t risk $60,000 on an unknown player, but my software said to play him, and I went with it. It’s a good thing I did. He caught his first and second NFL touchdown passes that day, winning me the championship and the $2M cash prize that came with it. Getting lucky looks easy.
As we raise our first venture fund, Gutter Capital, “what does gambling have to do with investing?” is inevitably the most common question that I’m asked. There is a perception that gamblers make successful investors, it’s almost a cliche. Bernard Baruch beat roulette by measuring the slant of the table. Buffett handicapped horses. Venture capitalists on twitter claim venture capitalists are great poker players. Yet nobody seems to know what one has to do with the other.
Don Valentine, the founder of Sequoia Capital, said that instead of going to business school where they may teach you how to raise money, he worked at Fairchild Semiconductor where he learned how to build a technology business. When my software business failed, instead of getting a job as a developer, or going to business school, I did what anyone with an advanced computer science degree would do. I became a professional gambler.
Gambling didn’t teach me how to build a technology business, or any kind of business for that matter. What it did teach me are the foundational skills that have been critical to my early success in venture. After a year as a full time fund manager, I can confidently say gambling has a lot to do with investing. Let me tell you how.
Having an edge means seeing something others don’t
The best spots in both daily fantasy sports (DFS) and venture are situations where you have good reason to believe that the future is not going to look like the past. There are a lot of smart people and they are all looking at the same information. It’s important to ask yourself: what am I doing that’s different? People tend to make decisions based on ease and comfort. It’s easy to say that tomorrow will look mostly like today. It’s uncomfortable to form a unique point of view, and risk the embarrassment of being wrong.
Alex Smith won me $1M for the first time, when he threw for 366 yards and 4 touchdowns in a losing effort to the New York Jets. That performance propelled me to the top of the field of Draftkings’ Millionaire Maker. Anyone who listens to sports-talk radio can tell you that Alex Smith doesn’t always perform like that. Sports fans are brutal. “What have you done for me lately” is the prevailing attitude. Athletes are only as good as their last shot. If they miss they’re a bum, they “suck.”
The reality is that professional athletes don’t suck. In fact they have been training every waking minute of their lives to perform in that next game. The wonderful thing about DFS is that to beat thousands of opponents, you often need to bet on unpopular players, believing that elite athletes who are down on their luck, are still capable of glory on the field. I have good news for you, they are.
Hedging is losing
Before gambling, I always thought of “risk management” as a conservative endeavor. One where you put comfortable guardrails in place to make sure that you never go broke. That couldn’t be further from the truth. Kelly Criteria is a well known, but mostly misunderstood, guide for optimal bet sizing. The conclusions are extreme. It’s hard to have an edge. When you do, bet the farm.
This concept came into play later on December 3rd, 2017, after winning the milly maker. The tournaments that night hinged on Pittsburgh Wide Receiver Antonio Brown’s injury status for Monday Night Football. He hadn’t practiced all week, and I had to submit rosters without any news on his listed toe injury.
When it comes to injury situations, most DFS player’s instinct is to avoid them. That’s wrong. When an elite player is questionable, either he plays and is one of the top choices of the night, or he sits out and his backup players get good. By ignoring the situation, you’re setting yourself up to lose in either scenario. It’s uncomfortable to play Antonio Brown, as I did, and risk money on a player who might not even suit up. But if your highest edge rosters have Antonio Brown in them, you can’t afford to dull your advantage. Is it more comfortable to lose in the long run, or to do what it takes to win?
On Monday, Antonio Brown not only played, he caught 8 receptions for 101 yards and a touchdown. Based on his performance, I won two tickets to the DraftKings Fantasy Football World Championship. Two weeks later, on December 17th, Damiere Byrd helped me win it. Having an edge not only means seeing something others don’t, you have to go all-in on it.
Getting lucky is hard work
From the outside, getting lucky looks easy. People don’t see the other side of the coin: the downswings, the losing months, the self-doubt, the countless times that I had a chance to win big and fell just short. By spending hundreds of hours studying, the best that you can hope to accomplish is to put yourself in a slightly better position to win than your opponents. If you do that, night after night, eventually good things will happen. But it still takes luck.
At its core, the element of chance is the common thread connecting gambling and investing. Because of it, you can’t rely on results to understand what is going on. To be effective, you must develop a process driven approach, where you judge decisions based only on the information available to you at the time, indifferent to what ends up happening. Something easier said than done.
Gambling is a terrific teacher because it forces you to do it. In poker, you play hand after hand. In fantasy sports, multiple slates of contests per day. Advantages compound quickly. If you’re making poor decisions, you’ll go broke. While investing requires many of the same skills, because the average investor makes money, it’s much harder to learn them.
The run I went on in December 2017 gave me the bankroll to kickstart my venture career. Since then, I’ve been investing my winnings alongside my long time friend and accomplished entrepreneur, Dan Teran. Over five years, we made over 100 small investments into early stage companies. We went to work for our founders, helping to build the core teams and accelerate their path to product market fit.
There’s a clear line between gambling and investment decisions, but that’s only one facet of the venture business. Unlike DFS, where you select players but don’t have influence over outcomes, a lot of the work goes on after the investment has been made. I am grateful in this chapter to work alongside Dan and Richard, and also partner closely with world class founders like Rachael Nemeth at Opus; JT White and Susanna Pho at Forerunner; and Abhinav Kapur at Bikky to continue learning what it takes to build companies.
We founded Gutter Capital based on the belief that the great businesses of our time will be built in response to humanity’s greatest challenges. If you’re inspired by my journey and would like to join me on this next one, please don’t hesitate to reach out.