How to turn the odds in your favor when you are playing a losing game

Fundamentally, building a startup is a losing game — the outright probability of failure outweighs the probability of success. But how can you use optionality and the ability to adapt your strategy to turn the odds in your favor?

Consider the following math problem (courtesy of @CutTheKnotMath):

Clearly A has an uphill battle. Playing aggressively, A is expected to lose more often than win. Playing conservatively, A can never win. Neither game style gives A the edge to win.

Let’s look at the possible outcomes of the match from A’s perspective. The dominant strategy for A is to always play aggressively when tied or losing and always play conservatively if winning.

The chance of winning outright in two games is 0.4050.

The chance of the match going to a Tie-Breaker is 0.0450 + 0.2475 = 0.2925.

A will play daringly in any tie-breaker, so the chance of winning the match in a tie-breaker is: 0.2925 * 45% = 0.1316.

So, A’s cumulative probability to win is: 0.4050 (winning outright) + 0.1316 (winning from tie-breaker) = 0.5366.

53.6%!?!?!?!

A is more likely than not to win the match? How is that possible?

A possesses one distinct advantage: the ability to change strategy with each game. If A had to choose a strategy in the beginning and stick with it, A’s dominant strategy would result in just a 42.5% chance of victory. But by having optionality, A becomes the favorite to win.

Optionality is more valuable to winning than skill.

The same holds true in business. When building a startup, any one strategy is more likely to lose than win, but by alternating effectively between strategies (even losing ones), you can swing the odds in your favor.

As Nassim Nicholas Taleb says:

A rigid business plan gets one locked into a present invariant policy, like a highway without exits — hence devoid of optionality. One needs the ability to change opportunistically…plans need to 1) stay flexible with frequent ways out, and, counter to intuition 2) be very short term, in order to properly capture the long term.

NFX published a great interview this week with Ben Rubin, the founder of Houseparty, that reminded me of this. In it, Ben tells the story of Houseparty’s roller coaster ride through four product iterations and an eventual exit. Houseparty’s journey highlights how they succeeded due to masterfully exploiting optionality along the way, but also how relinquishing their optionality in the end (by exiting) is why they missed out on owning one of the most popular apps in the world today.

Building startups is hard. And ultimately, startups do not have endless optionality — unless of course they are cash flow positive ;) — when the money runs out, the time to try new things runs out as well. But by living to fight another day (which is why many startups have cut burn over the past few months), staying flexible and adapting their strategies as new information becomes available, startups can greatly increase their probability of success.