Win Bigger By Betting Smaller

Dennis Zdonov
Sep 13, 2018 · 8 min read
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What do professional card counters, Chris Rock, and Pixar all have in common?

They all have built a winning process around betting small before betting big.

De-risking uncertainty through “Small Bets” may seem like an intuitive strategy — yet too many times, I’ve seen it fall apart in practice. Emotions get in the way.

This has happened to both myself and to some of my friends. In this article, I’m going to reflect on mistakes that I’ve personally made as a founder of a gaming studio, and look at ways of curbing emotion and applying small bets in these 5 common business functions:

  1. Recruitment
  2. Promotion
  3. Compensation
  4. Branding
  5. Product Development
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In 1986, Pixar was in the business of selling its Pixar Image Computers for $135K a pop. Special effects contracts and custom hardware were the company’s bread and butter business at the time. In 1988, Pixar made a small bet by making a five-minute animated short called Tin Toy. The film won an Academy Award and paved the way for Pixar to make bigger bets into feature-length CGI films. And everybody knows how that went. :)

Chris Rock has taken the small bets approach even further. Instead of testing just one or two small bets at a time, he tests dozens or even hundreds of new jokes at tiny, local stand-up joints before taking his material nationwide. There is nothing glamorous about this approach, but it works, and it ensures that only the “winners” make it into Rock’s final routine.

So, what makes small bets so difficult to implement in practice?

Optimism. Confidence. Excitement. Empathy. These are all positive emotions that every founder should want to possess and tap into, especially when it comes to making important decisions — right?

Not exactly.

Emotion often compels founders to bet too big too soon.

As a founder, I’ve seen firsthand how unchecked confidence or passion can trick someone into rushing important decisions and making mistakes. Below are a series of big bet mistakes that I’ve personally made and have seen others make, too:

Big Bet Mistake #1: Making a Big Hire Too Fast

Many have experienced this — I know I have. You feel a rush of excitement after interviewing a kickass candidate. They look so solid on paper — having a proven track record and valuable skills — that you hire them right away.

  • Problem: This might be the most commonly rushed mistake founders make. And the reason has to do with a wide range of potential unknowns: the hire in question could be used to a larger team, they might require extensive support in order to be effective, or their expertise might only be applicable to a different sort of company.

Instead of hiring this person right away, you can replace that big bet with:

  • Small Bet Option — Consulting Gig: Bring them on as a consultant, or hire them part-time to help you solve your most difficult problem. See how they perform and how well they interact with people on your team. This will allow you more time to gauge how they interact with teammates and mesh with the culture — insight interviews and tests can’t always provide. We did this at my gaming startup with a lot of our employees — ranging from 3D modelers to engineering leaders.
  • Small Bet Option — Paid Trial Period: Hire the person for a mutually agreed upon 90-day trial period, where they start at a reduced rate and receive a pay bump and potential bonus if the trial is passed.

Big Bet Mistake #2: Promoting Someone Too Fast

You feel a lot of positive emotions when someone on your team turns in great work, or when someone consistently crushes it as an individual contributor (IC). As a result you may want to reward them with a more important role with increased responsibility — a role which they might not be ready for.

  • Problem: This rushed decision often occurs when an employee directly asks for a promotion. If they’re an IC, you’ll feel pressured to meet those demands. The problem with promoting someone too fast, however, is they could turn out to be a bad manager. Which means you end up with a bad manager and also “lose” one of your top contributors — who is now forced to split time between contributing and managing.

Instead of promoting them right away, you can try a solution, like:

  • Small Bet Option — Feature Owner: Make the IC a feature owner with temporary ownership over one small component of a larger process or service and see how well they communicate and execute.
  • Small Bet Option — Delay the Title: Preemptively let the IC know that you’re considering them for a promotion, but would like to them start handling the responsibilities without the title bump. Conduct weekly check-ins for two to three months, just to see how they’re doing, and remind them that if things go well, they’ll get the title — and if not, you’ll coach them and reconsider in the future.

Big Bet Mistake #3: Offering High Salaries, Bonuses, or Raises Too Soon

This is when you’re tempted to offer an excelling employee or enticing new prospect a large bonus or salary.

  • Problem: Look, the labor market for tech is very competitive, and it’s hard to find and keep good talent, especially in the Bay Area. That’s why it’s so tempting to throw money at people to try and keep or recruit them. The problem, of course, is that the benefit of giving someone a raise is temporary: when people get a substantial raise they feel good and motivated for a few months, but then quickly grow accustomed to the new status quo.

Instead, try:

  • Small Bet Option — Milestone Cash Bonuses: Offer new hires a lower base salary to start, but tie in cash bonuses for hitting specific goals, milestones, or metrics. This helps incentivize overall performance and helps self-select for high performers. Wall Street has used discretionary cash bonuses really well for attracting top talent, and more and more companies in the tech world (like Tencent in China) have adopted similar practices.
  • Small Bet Option — Milestone Equity Bonuses: Offer equity bonuses tied to clearly defined milestones, as opposed to a structure based around continuous vesting.
  • Small Bet Option — Bonus/Raise Discussion Calendar: Set up a very clear timeline regarding when bonus/raise discussions are going to happen so that emotion is removed from the equation.

Big Bet Mistake #4: Pumping an Untested Brand

I call this the “Bing Problem,” and I saw it first hand while working at Microsoft. This is when you start investing lots of money into a new product, brand, or marketing campaign that you personally believe in, but that you don’t know will succeed, since you haven’t done any “small bet” research to identify how your audience will respond.

  • Problem: I’ve seen it too many times. A founder comes up with a new name, logo, or look that they’re just certain will succeed — then they dive in head first. The problem here is, most of the time, you end up with a sort of middle-of-the-road brand that suffers from positioning problems, low conversion rates, too many disconnects between marketing promises and the actual delivered product, and a message that doesn’t resonate or feel authentic.

Some of the best small bet solutions in this case are:

  • Small Bet Option — Test Marketing Fit with Ads: Run targeted ads for different names, logos, and visual styles and measure who is clicking on what — which interest groups, demographics, etc. I talk about how we’re doing these types of tests in the gaming industry, for everything ranging from app icons to even names of the games themselves, in this article on getting valuable feedback.
  • Small Bet Option — Ramp Up Slowly: Increase your spending slowly to make sure your messaging lines up with what your product can deliver. Companies who don’t do this learn the hard way that it has consequences. Just ask Bing. When Microsoft launched Bing, it rolled a marketing campaign so big that almost every person in the US tried the new search engine. Once. Even though the product has improved a lot since the launch, at the time it simply didn’t live up to its bold claims of being a “decision engine.” Many of the early users were left so disappointed that no marketing spend thereafter could bring back them back.

Big Bet Mistake #5: Building Proprietary Tech Instead of Using Off-the-Shelf Tools

This is when you build everything in-house, from scratch, because you believe it gives you a competitive advantage. If you’re a startup with a finite amount of capital and you cannot confidently say that your in-house infrastructure will be your company’s biggest competitive advantage, you should be prioritizing speed to market.

  • Problem: This problem plagues tech companies, specifically, because most have a strong engineering ethos. In reality, while building proprietary technology might lend you an advantage, in the early stages for most companies, the building process can suck up time and slow you down. Early on, your bottleneck will most likely be the sales/marketing/distribution side of things — not the tech. We’ve made this mistake at Dairy Free Games by spending a lot of energy on our own game engine, and our own tools, when we could have spent that time on social systems and market testing.

To bet small on this first, try:

  • Small Bet Option — Leverage Existing Platforms: Build on top of existing platforms that offer integrations. In gaming, Unity is a great example. The speed you gain will outweigh virtually all the other downsides.
  • Small Bet Option — Use Existing Tools: Use premade tools instead of building your own even if they seem expensive. For analytics, use something like MixPanel; for customer messaging, choose something like Intercom. You can always build your own tools later when you know exactly what you want to improve and have a real need for them.

These are five of the most common mistakes I have made myself or seen friends make, but I’m sure there are others. And I would love to hear some stories from other founders out there.

Hopefully these five present a starting point, though, for you reflect and confirm that you’re not making any crucial big bet mistakes in running your business.

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