Startups are like gambling: Why learning “bet” practices is more important than “best” practices when it comes to your venture

Creating a successful company has more in common with gambling than operating a sophisticated businesses.

Everyone loves a heroic tale and Silicon Valley is full of them. There’s the genius entrepreneur who dropped out of college and forever changed the way we used blood diagnoses…or not. Or the rideshare CEO that was crushing it so much that it didn’t need close oversight from its savvy board. Why mess with something that was working? Or that social network that keeps succeeding despite its CEO who missed mobile, dropped a couple billion on a VR company over a weekend, and underestimated the effect of fake news on his platform.

It’s hard to think of a group of investors and founders that did everything perfectly. The reality is, if creating a successful startup was merely a case of aligning all of the right people and investors, then there would be no mystery to it. But creating a successful company has more in common with gambling than operating a sophisticated businesses. Really smart people fail all the time and not-so-smart people prosper. There’s a random nature to success. Only about 20 percent of startups even get to a series B and the odds of creating a unicorn are 1 in 5 million.

That means if you start a business, most likely you will fail, your friends will silently feel sorry for you and you’ll be embarrassed by it even if you get good at acting like you’re not. Your endless hours of stress and toil will most likely only yield regret.

Harsh, I know, but there are things you can do to improve your odds. That’s no guarantee of success, but it puts you ahead of those who aren’t aware of the odds and their ability to change them.

Your odds rise infinitely just by entering the game

To quote Nassim Taleb in Black Swan: “The strategy for discoverers and entrepreneurs is to rely less on top-down planning and to focus on maximum tinkering and recognizing opportunities when they present themselves.”

In other words, you can’t win very much if all you do is spend all your time at the penny slots and you can’t win big unless you pull up a chair at the high stakes table. Personalities and intelligence levels vary widely among successful entrepreneurs- the one thing that is consistent is that 100 percent of them got into a game. Win or lose, they all had the guts to sit at the table.

You can’t control the cards, but you can control how you play the game

One of the most fun parts of being in a startup is that you get to wake up every day and try things and see if they work. It’s extremely rewarding to be able to go from concept to product to feedback in a relatively short amount of time.

Each time you put something out there into the world you’re playing a hand at the blackjack startup table. The combination of funding and your burn rate determines hands you get to play. Bet too big on losing hands and accelerate your demise — double down on potential winners and bet big and it erases any prior losing streak (where you’ve kept your bets small).

But unlike Vegas casinos that set the rules of the game to put them in the house’s favor, there’s no “house” in the business world. Instead, inexperience and a misunderstanding of what’s important reduces your odds of success. But while Vegas bans you from counting cards, startups can juice their odds by gaining experience and understanding of what are opportunities to double down on, minimizing losses on losing hands, and winning over time.

The basics

Startups don’t emerge fully formed. They are an idea, a small group of people and some money. The way to maximize your odds is to remove any preconceived notions and instead pay close attention to the response to all of your moves. Everything is a test. Every bit of feedback is a signal.

Like a living organism evolving over time, your startup needs to look at what’s working and discard what isn’t. In order to do this effectively, you need to chunk your work into small segments. To belabor the metaphor, your environment as a startup is other humans, so understand and adapt to your environment.

Companies and ideas fill niches in this environment. If some company will be the X of a new category in the future, a company will need to exist to do Y. You will need to understand what about the future environment means that your company needs to exist and that the niche is large enough to justify all the risk you’re taking on.

VCs are playing a different game

Your investors aren’t there to teach you. Why? They are not playing the same game as the entrepreneurs they fund. VC’s are spreading their bets across multiple entrepreneurs knowing that a certain number will fail, some will do OK, some will be winners and once in a while, they’ll fund a whale.

VCs aren’t there to figure this all out for you. They are betting that your scrappiness and intelligence will allow you to figure it out, even if that means repeating many of the mistakes that others have made.

That’s how it should be…. for them. Lose or win- they’re putting their overall odds in their favor. But that “loser” could be you, and failing, sucks- big time. Don’t let anyone tell you otherwise. So for entrepreneurs, if you want to “R” in ROI to not stand for “regret”, it’s prudent to figure out how to play the game before you start throwing bets around. That’s what we’ll cover in the next segment of this series.